Behavioral Strategy: Thoughts and Feelings in the Decision-making Process, the Unconscious and the Company’s Success
It is evident that the psychology of the decision-making person – to a certain extent the human factor – plays an important role in the finding and determination of strategies. Bearing in mind that strategic decisions are never made as rationally as they are always believed, it is a welcome change that this often overlooked area, Behavioural Strategy, is receiving the attention it deserves. In her book, Claudia Nagel has successfully developed an innovative concept for the further development of business strategy work. Her concept targets the improvements of strategic thinking and its effective implementation. She makes a case for the culture of cooperative discourse that determines what is right – and not a discussion that is sustained by the need to be right. In this excerpt, Dr. Nagel introduces the four stages of her “Behavioural Strategy” approach to contemporary strategy development.
“Behavioral Strategy” – The New Approach
Today, we know a lot more than we did when we first started working with corporate strategies. We now know how people make decisions and by which conscious and unconscious factors these processes are affected. Carl von Clausewitz (1780-1831), a well-known military theorist of his time, is considered one of the founders of strategic management, whereas the topic only surfaced on the corporate agenda in the 20th century; to be exact, in 1912 through a “Business Policy” course given at Harvard Business School. The topic of this seminar was to integrate the knowledge from the functional areas of companies (accounting and finance as well as operations) in order to solve long-term problems. Therefore, the strategy concept being used today is mainly based on the number-specific or financial considerations of business entities. This approach only made real progress in the late 1950s and 1960s. In this regard, the US public administration researcher Kenneth R. Andrews quite possibly was the first to formulate this still relevant requirement: “Every business organization, every sub-unit of an organization, and every individual (ought to) have a clearly defined set of purposes or goals which keeps it moving in a deliberately chosen direction and prevents its drifting in undesired directions.”1 He is known as the father of methods and tools such as “industry notes” and “company cases”, but also the SWOT analysis. In all of this, the modern understanding of strategy is mainly influenced by the work of the leading management consulting companies (McKinsey, BCG, Bain, Arthur D. Little, Booz, Allen & Hamilton, Oliver Wyman) as well as through the work of pioneers who are viewed as management or strategy gurus (Peter Drucker, Alfred Chandler, Igor Ansoff, Michael Porter, Peters and Waterman, Hammer and Champy, March and Simon, Gary Hamel, Fredmund Malik). Even the German microeconomics curriculum is subjected to the US development but, in terms of the corresponding trends, has partially developed on its own.2
However, the understanding of how we as human beings make decisions has not yet been included in the critical reflections related to the specific conditions of strategic thinking. It still applies that in business studies – but also in the world of business in general – the basic assumption of the “homo oeconomicus” is common: A being who continuously makes rational decisions in order to maximize his or her benefit. Only more recent research such as “Behavioral Economics” and “Behavioral Finance” increasingly calls this theory-based construction into question and assumes that unconscious influencing factors lead to cognitive biases.
In this sense, even feelings in general, intuition and the “gut instincts” often heard from entrepreneurs are now shifting into the focus of scientific consideration. The goal is to examine the psychology of the acting business subjects, the investor and the decision-maker in order to derive recommendations based on the relevant knowledge as to how the trained behaviors can be optimized. In addition to the traditional understanding of strategy in which mainly numbers, data and facts are of interest and applicable, the “Behavioral Strategy” approach enables us to effectively incorporate our brain’s individual and social functions as well as our psychic and interpersonal processes, which go far beyond rational thinking. When we find ourselves in decision-making situations we unknowingly utilize shortcuts of long thought processes, intuition and feelings in a highly individual manner. For each individual, and as a group, this may not only result in barriers of thought and motivation within the leadership team and among the employees – barriers which would prohibit a successful implementation – but if the resources are used properly, new, creative and future-oriented solutions that previously seemed unattainable and unrealistic can be found. We should make this advantage available to us.
In order to work on these typical six weaknesses affecting strategies, I have developed the “Behavioral Strategy” approach into a multi-stage process. I will now explain the first three stages in detail to you and provide explanations so that as an entrepreneur, CEO or a managing director you can understand the reasoning for this approach and will be able to apply it.
Four Stages of Contemporary Strategy Development
In the second stage of creating a success team, you aim at understanding how well you know your leaders, in particular your management team and how you are able to develop these very important people. In order to do so, you must know how psychosocial defense mechanisms work.
In the third stage of strategic decision-making in the team, you will learn how your unconscious impulses and the unconscious impulses of your team members shape the alleged rational decision-making process.
In the fourth stage of implementation and culture change, which we will only touch upon in a cursory manner, we will deal with the corporate and management culture resulting from the first three stages and whose principles are anchored in all areas of the company, thereby enabling the implementation of the strategy. This fourth stage also increases the attractiveness of your company as an employer, particularly since you need exceptional leaders and specialists for the realization of your strategies. The global job market is increasingly being determined by the battle for these talented individuals. The implementation of the first three stages of the “Behavioral Strategy” concept serves this appeal. In the cotemporary strategy development process, theory and practice go hand-in-hand.
You will only get to know the weaknesses of your decisions if you know how you turned into the person you are today and why. The insight into your own way of functioning is the instrument with which you can make better decisions. Without certain theoretical knowledge you will not be able to optimize your abilities either on your own or in a team. In this respect, I ask you as the practitioner to stick with it. I promise you that it will be very interesting, educational and helpful. There is a lot to learn in dealing with yourself and your character as well as with the other personalities in your team. You will not be bored.
The Unusual Nature of Strategic Decisions
Strategic decisions differ from other decisions in the company, especially through their long-term implications and the consequences of their significance. In addition, these long-term implications create uncertainty in regard to the future development of the surrounding conditions and the environment in which the company operates.
Within this kind of long-term orientation, companies are focused on creating sustainable competitive advantages, either by establishing a unique market position, creating more efficiency, manufacturing highly desirable products or offering especially low prices. The customer should always more willingly purchase your products or services than those of your competitors. You and your company can only survive if your revenue covers your manufacturing costs as well as your cost of capital and still leaves enough for a good profit margin. In order to create these types of competitive advantages, companies usually need a strategy.
However, the company’s inner alignment is usually a product of the strategy’s psychological effect. This is eminently important for the employees, since their understanding of the strategy directs their actions in the desired directions. They orient themselves to these guidelines and in doing so find a place for themselves in the company. In other words, clear strategies create the cognitive perception of order and stability and in the process reduce the complexity of perception. On the other hand, strategies can also lead to a loss of creativity and flexibility, since “for organizations they [are] what blinders are to horses: they keep them on the right path, but inhibit the ability to see what is off to the side.”3
Explicit strategies provide a clear direction but they also bear the risk of being too rigid and not allowing any deviation from the strategic path. The result is that too much focus is placed on the long-term goal so that developments to the left or right are neither considered nor integrated.
The art of good management lies in the ability to hold this tension and, if required, to revaluate the course and to communicate the new measures within the company. These questions should be validated on an ongoing basis:
• Do we have to change direction?
• What signals should we heed? What signals are important
• What developments will be important for our markets/
products/customers and for the company?
• When and how do we need to react and with what?
• What and how do we need to adjust or redefine?
Excerpted from Dr. Claudia Nagel, Behavioral Strategy – Thoughts and feelings in the decision-making process, The unconscious and the company’s success (2013 & 2014) pages 18 – 21. Published by kind permisssion of Unternehmer Medien in Bonn/Germany (2013 & 2014). Copies can be ordered through: http://www.unternehmermagazin.de/shop/e-books/
About the Author
Dr. Claudia Nagel founded her management consulting firm in 2005 in Germany. She is an international expert on corporate strategy development and transformation processes and has published extensively. Having lived and worked in various cities, she consults to international boards, top management teams and managing directors on strategic management and the design of organiational and personal change processes. Claudia obtained the qualification of Dr. Phil. in Organisational Psychology from the University of Hagen and is also a Chartered Psychoanalyst. In addition, she has a Master in Business Administration from the University of Cologne and HEC (Paris). Her apprenticeship in banking was conducted at Dresdner Bank AG Köln (1985-87).
1. Andrews, K.R. (1987): The Concept of Corporate Strategy, Homewood, pp 23
2. See Staehle, Wolfgang H. (1991): Management. Eine verhaltenswissenschaftliche Perpektive, Müncgen 1991
3. Mintzberg, Henry, et al. (1999): Strategy Safari. A Guides’ Tour through the Wilds of Strategic Management, New York.