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Strategy’s Most DangerousDogma - And What To Do About It
Evan M. Dudik
Evan M. Dudik and Associates, Inc.
Evan M. Dudik and Associates, Inc.
What are Strategy’s Basic Building Blocks?
First Class Corporate StrategyFirst Class Corporate Strategy
NeededResources
NeededResources
Cultural andOrganizational
Alignment
Cultural andOrganizational
Alignment
Sustainable Competitive Advantage
Concept
Sustainable Competitive Advantage
Concept
Other FactorsOther Factors
Verified Theories
about Markets and Competitors
Verified Theories
about Markets and Competitors
Evan M. Dudik and Associates, Inc.
1. Create doubt in your mind about Verified Theories as the Foundation of Strategy
2. Propose an Alternative Mind-Set for developing Strategies
3. Gain some Feedback on these Ideas
Purpose of Today’s Discussion
Evan M. Dudik and Associates, Inc.
• “Our cell phone market research shows that 23% of the market would pay a 12% premium for wireless email capability.”
• “In our industry you get superior returns if you are # 1 or #2.”
• “Our database of the past 25 years and 2 million transactions shows 95% of the time that the yields of interest-bearing bonds converge within 30 days.”
• “New products are more profitable than old ones. Our strategy is to have 80% of our sales from products that are less than 5 years old.”
1. Examples of Verified Theories
Evan M. Dudik and Associates, Inc.
• Conclusions based on observation of data (“fact-based”)
• Synthesizes recognizable patterns
• Is expressed mathematically
• Has a track record of predictive success
What more could you want?
1. Ideas Behind Verified Theories
Evan M. Dudik and Associates, Inc.
How Philosophers of Science Look at Drawing Conclusions from Data: Example 1: Raw Data
Evan M. Dudik and Associates, Inc.
Example 1 continued
Evan M. Dudik and Associates, Inc.
Example 1 continued
Evan M. Dudik and Associates, Inc.
• Useful
• Beautiful
• Consistent
• Memorable
• Basis for Prediction– Hundreds of “confirming” examples
• No basis in reality
Observations from Example 1
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Example 2: Danger of "The First Right Answer"
Evan M. Dudik and Associates, Inc.
Example 3: Power of Past Experience
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Example 4: Power of Context
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• Provides checks for internal consistency
• Statistics can measure variations due to chance
• Strong associations suggest causality
• Makes for persuasive presentations
Will Mathematics Save Us From Misleading Inferences?
Evan M. Dudik and Associates, Inc.
Linear Regression
Lower than averageLower than average
Higher than averageHigher than average
Low Income High
Demand
Example 5: Using Mathematical Models
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Linear Regression
Lower than averageLower than average
Higher than averageHigher than average
Low Income High
School Test Performance
Example 5: Context Makes Sense
Evan M. Dudik and Associates, Inc.
Linear Regression
Lower than averageLower than average
Higher than averageHigher than average
Low Income High
School Test Performance
Example 5: Ignore Outliers?
Evan M. Dudik and Associates, Inc.
In particular, at Mt. Tabor and other high-performing schools:
• Scheduled routine teacher conferences with principal during regular working hours
• Implemented new teacher mentoring system• Dug into the test data: teachers, students, course
items• Identified specific weak spots: e.g.
understanding science texts literally, not just high-energy teaching
• Started homework clubs, extra work for those above grade level
• Created schools-within-schools (Bill & Melinda Gates Foundation
Lessons from the Outliers:Due to Chance?
Evan M. Dudik and Associates, Inc.
Major discoveries and investigations due to examining the outliers:
• AIDS—the 2% of women who got HIV but never developed AIDS
• Discovery of H. Pylori—bacteria causing 80% of ulcers
• School teacher incentives encourage cheating: data in test scores where answers are same
• 220-Age = Maximum heart-rate: Bogus
• Discovery that extra-solar system planets may be stars
Lessons from the Outliers:Outliers: Crucial in Science
Evan M. Dudik and Associates, Inc.
• Dot-com mania: A few, highly imitated business models, e.g. advertising-based; disintermediation-based; auction-based
• “Be #1 or #2 in every market you compete in”—repudiated 6 years ago in secret
• Learning curve-based strategies
• And now…Sustainable competitive advantage-based strategies
Business Strategies Not Immune to Astrological Thinking Verification Mania
Evan M. Dudik and Associates, Inc.
If any business runs on statistics, it’s insurance. Yet:
• Merrill Lynch: Limiting health care costs by expanding benefits– Spells the end of managed care as we know it
– Anybody listening?
• Progressive Insurance: auto insurance paid by the mile instead of all-you-can drive– Exploits “new” technology for a more precise
matching of product to customer
Business Strategies and Outliers
Evan M. Dudik and Associates, Inc.
• Outliers provoke good questions about causality– Merrill Lynch: better ideas about causes of high
health insurance claims– Progressive: better ideas about causes of high auto
insurance claims
• Outliers provoke good questions about mathematical models (summaries) of data
• Outliers provide suggestions about better ways to segment markets– Merrill Lynch: companies with long-term employees
and white collar jobs may be targets for highly interventionist medical insurance
– Progressive: Low-mileage, cost-sensitive drivers; highly congested areas.
Business Strategies and Outliers:Lessons Learned
Evan M. Dudik and Associates, Inc.
• Difficult to separate facts from their interpretation: there are no “pure facts”– Consultants to the contrary not withstanding
• Math can obscure the true structure of a phenomena– Create patterns rather than show patterns (constellations)– Obscure 3rd variables– Often don’t handle extremes (quantum mechanics, light)– Better for falsifying rather than confirming
• Patterns are rhetorically persuasive but poor strategic guides– Patterns of others (e.g., GE, learning curve)– Mathematical patterns (e.g. regressions)
• Challenging outliers is one method for pursuing the essence of a strategy
Resting Data on Unshakeable Facts:Lessons Learned
Evan M. Dudik and Associates, Inc.
No.Sir Karl Popper says: • A theory cannot be proved right• It can only be rendered so precise as to be
tested until it fails.• When it fails, it:
– Clarifies why it “passed” all prior tests– Provides deeper insight into the phenomenon it is
supposed to explain– Points the direction to the next test
• Outliers are sometimes true anomalies outliers - but sometimes they illustrate where theory fails.
Can We Rest Strategy on Verified Theories?
Evan M. Dudik and Associates, Inc.
Vague/ General:“Everything” confirms it, e.g.:
• Being #1 or #2
• Our strategy is to focus on customer service
• Our strategy is innovative products
• Our competitive advantage is our people (knowledge base, philosophy of business, R&D, etc.)
Metaphysical:Articles of faith that can’t be falsified:
J&J Credo: mothers, employees, community, investors
“We don’t test for AIDS because there is no AIDS in China.”
What Are Poorly Constructed Business Theories?
Evan M. Dudik and Associates, Inc.
• An hypothesis is a risky If…Then...Because statement that has guts enough to identify causality.
• The hypothesis must be specific: • “If we increase store lighting by x lumens per square foot and
widen aisles by y inches and employ greeters at $8.50/hours…
• “Then we can expect a sales increase of $x per square foot in the first 90 days $x + $y in the next 90 days in the a, b, and c departments…
• “Because x% more shoppers will be drawn to aisles in the A, B, and C departments and will spend y more minutes there”
• The hypothesis must be falsifiable:• We increased the store lighting and employed the greeters• We experienced a 5% per s.f. sales increase in departments A
and B, but sales in C (auto supplies) were flat• We experienced 6% more shoppers spending 1:39 minutes
more in department A, 5.2% and 1:07 minutes in B; nothing different in C (auto supplies)
Treat Strategies as Hypotheses Specific Enough to be Falsifiable:
Evan M. Dudik and Associates, Inc.
• Perhaps the lighting changes made gender specific differences (auto department vs. others).
• The greeter had no effect on sales• The key to greater sales is getting
shoppers to spend more time in the aisles• And more…
The Test of the Strategic Hypothesis Leads to New Insights and a New Hypothesis
Evan M. Dudik and Associates, Inc.
• Create competing hypotheses—and teams supporting each– The proponents of each will do their best to
falsify the opposing hypothesis– CIA: “B” team created to falsify “A” team– Gets rid of “my opinion is as good as your
opinion”• Pit consultants/strategic planning teams
against one another– Not (just) in the beauty contest
• Use market research for testing highly specific hypotheses—not fact-gathering
• Use math to falsify, not reveal patterns
This Approach Suggests Practical Affects for the Strategic Planning Process
Evan M. Dudik and Associates, Inc.
“Keep looking around. There's always something you've missed.” - Australian Aviation Magazine
Conclusions About Strategic Theories
1. Don’t create strategies by looking for patterns in data—you’ll just see what you’ve already seen
2. Treat strategies as If—Then—Because Hypotheses
3. Make the strategic hypotheses testable and falsifiable
4. Create competing strategies and teams to defend them.
5. Understand the value of outliers.
6. Look for deeper layers of causality.
“General relativity theory is ephemeral.” - Albert Einstein
Evan M. Dudik and Associates, Inc.
• Schools highly comparable on measures of income:
– Comparable percent of kids have taxpayer-provided lunches
– Comparable percent of parents college educated and no college
• Vastly different outcomes:
– Mt. Tabor had 77% vs. 64% reaching reading benchmark
– Mt. Tabor had 76% vs. 57% reaching math benchmark
• Over 1 grade level average difference
Lessons From the Outliers:Different Outcomes
Evan M. Dudik and Associates, Inc.
Interviews suggest a much deeper causality:• Beaverton “Superintendent Yvonne Katz boasts that :
"Our scores remain consistently higher than the state average."
• “A traditional collection of stories, each followed by a routine list of questions, got the nod over a series with more challenging literature and deeper questionsThe reason? The district's influx of novice teachers needed something easy to work with
• “Principal Nancy Bush-Lange says preparation for the test was uneven at feeder schools and Heritage needs more time to jell. “
• "I'm proud of our kids, even though if you look at our (test) scores you'd say, 'Wow, I wouldn't send my kids there,' "
Lessons from the Outliers:Due to Chance?
Evan M. Dudik and Associates, Inc.
• “All hell” was to break loose in Miami in December 1990 and January 1992 due to alignment of earth sun and moon—and did. (Lots did happen—but not more than at other times).
• Graphs prove homicides to peak at full moon (Only 3 of 48 tests showed any significant correlation).
• Full moon peaks changed to “underlying semi-monthly rhythm.” (Just average adjacent data points)
Voice of Authority
A Source for Confirming Data