Behavioral strategy Powell, Thomas C.; Lovallo, Dan; Fox, Craig R.
Strategic management journal,
December 2011, Letnik:
32, Številka:
13
Journal Article
Recenzirano
Behavioral strategy merges cognitive and social psychology with strategic management theory and practice. Despite much progress, the aims and boundaries of behavioral strategy remain unclear. In this ...paper we define behavioral strategy and identify the main unsolved problems. We propose a unifying conceptual framework for behavioral strategy and conclude by introducing the papers of the Special Issue on the Psychological Foundations of Strategic Management.
Executives use analogies to improve strategic decisions. However, existing research provides little guidance on the types and number of analogies that produce the best decisions. We examine models of ...analogy and present findings from two empirical tests. The first test, a study of private-equity investment decisions, finds that an 'outside view'— forming a reference class of analogies—performs better than a few analogies familiar to the decision maker. The second test, a study of film revenue forecasts, compares a new model we call similarity-based forecasting (SBF) with existing methods. The study finds that SBF, which combines elements of reference class forecasting and case-based decision making, produces better forecasts than regression models. We discuss the consequences of our findings for research and practice.
Private and public megaprojects-whether new plant facilities, IT systems, railways, or the Olympics-frequently entail dramatic cost and schedule overruns. Root causes are behavioral biases, such as ...optimism and deliberate deception, accompanied by principal–agent issues and a lack of project-related skills. Through a three-stage process-forecasting, organizing, and executing ("FOX")-we organize and offer solutions to mitigate the cognitive biases and agency issues planners and policy-makers face in large projects. Following the FOX process and building on behavioral decision theory, we review evidence for the accuracy of "reference-class forecasting," which considers comparable past projects to forecast a current, planned project. We provide evidence for reference-class forecasting performance and recent methodological extensions, such as similarity-based forecasting. Then, considering the relevant literature, we offer organizational solutions to reduce unfounded optimism and deception, including debiasing techniques and specific measures to curb principal–agent issues. Finally, we suggest combining a project modular design with speedy implementation for faster, better, cheaper, and lower-risk execution. Overall, we offer an original, holistic theoretical view that addresses both behavioral and strategic elements of how to debias large projects, along with direct practical implications and advice for those who manage megaprojects with increasingly high stakes and risks.
Purpose
This study seeks to understand how business group-affiliated firms perform in emerging markets. Previous studies identify that in spite of changes in the competitive landscape, seemingly ...counter-intuitively, business group affiliates outperform their standalone counterparts in emerging markets. This study adopts a knowledge-based view to resolve this apparent paradox.
Design/methodology/approach
This study uses a problematization methodology to qualitatively analyze the strategic decisions of Indian business group-affiliated firms. This study cross-validates their analysis with the empirical results available in published academic and practitioner articles.
Findings
Previous studies explain this outperformance paradox based on assumptions that include filling institutional voids, access to strategic resources and leveraging political connections. By questioning these assumptions, this study identifies an alternative explanation that is based on affiliates’ ability to adopt a strategic approach that balances knowledge capital acquired through international expansion and innovation.
Practical implications
The findings have important implications for managers of business group-affiliated firms in emerging markets, as well as for those in developed markets seeking to compete or collaborate in emerging markets.
Originality/value
This study provides a framework for managers of business group affiliates to identify suitable pathways to higher levels of competitive advantage.
Research summary
We examine the correlations between financial resource allocation flow between business segments and two measures of overall firm financial performance using a sample of Compustat ...firms. Our analysis finds a consistent inverted U‐shape (or alternatively, V‐shape) relationship between those measures and firm profitability. Interestingly, nearly all the data lie on the upward sloping part of the curve. Taken together, these results support the notion that flows of financial capital are most often positively correlated with financial performance.
Managerial summary
A key question for any organization is how reallocating capital across business units is related to overall firm performance. We examine the correlations of firm profitability with a measure of change in year‐to‐year allocations across business units in a data set of several thousand firms spanning 18 years. Except in cases of the most extreme reallocations, our measure of firm reallocation is positively correlated with firm performance. Because we cannot prove causality, we cautiously conclude that our findings are consistent with a story that, in most cases, firms would benefit from greater internal reallocation of capital. The managerial question then becomes “what dynamic capabilities are necessary to increase the flow of resources across business segments?” Policies aimed at increasing allocation flow are likely to be beneficial.
The ability to sense valuable strategic options and then to organize effectively and efficiently to embrace them is at the core of a company's dynamic capabilities. This article identifies and ...discusses a specific type of sensing that we call “generative sensing.” Companies and executives that display generative sensing capabilities proactively generate hypotheses about observed events and then test these hypotheses to generate new data in a recursive process. Borrowing from design cognition research, we discuss the two microfoundations of these capabilities—framing and abduction – and provide examples of how they are embedded in companies to enhance option generation.
"Over budget, over time, over and over again" appears to be an appropriate slogan for large, complex infrastructure projects. This article explains why cost, benefits, and time forecasts for such ...projects are systematically over-optimistic in the planning phase. The underlying reasons for forecasting errors are grouped into three categories: delusions or honest mistakes; deceptions or strategic manipulation of information or processes; or bad luck. Delusion and deception have each been addressed in the management literature before, but here they are jointly considered for the first time. They are specifically applied to infrastructure problems in a manner that allows both academics and practitioners to understand and implement the suggested corrective procedures. The article provides a framework for analyzing the relative explanatory power of delusion and deception. It also suggests a simplified framework for analyzing the complex principal-agent relationships that are involved in the approval and construction of large infrastructure projects, which can be used to improve forecasts. Finally, the article illustrates reference class forecasting, an outside view de-biasing technique that has proven successful in overcoming both delusion and deception in private and public investment decisions.
Resource allocation in firms is often done in relative terms. Allocations to each project or, in the case of multibusiness firms, business segments are not made independently but through comparisons ...among the options. In that context, it becomes particularly important to identify the organizational factors that might influence those processes, as well as the mechanisms that create that influence. In this article, we investigate one of those potential factors—the size of a business segment relative to the rest of the organization—and two possible accounts. One is a naive tendency to spread out allocations evenly over the firm’s segments that would cause managers to relatively ignore differences in size and favor smaller segments over larger ones, holding other variables constant. The second is a tendency to direct larger allocation to the segments with the most political power and clout within the organization, which would normally favor larger segments, as those generally possess more influence. We investigate these competing hypotheses in a cross-section of firms to conclude that both mechanisms are partially at play. We find that both the smallest and the largest of segments are favored in the capital allocation process. Moreover, we find that the segment’s growth and profitability as well as corporate management ownership of the company moderate those effects.
Five things you should know about cost overrun Flyvbjerg, Bent; Ansar, Atif; Budzier, Alexander ...
Transportation research. Part A, Policy and practice,
12/2018, Letnik:
118
Journal Article
Recenzirano
Odprti dostop
This paper gives an overview of good and bad practice for understanding and curbing cost overrun in large capital investment projects, with a critique of Love and Ahiaga-Dagbui (2018) as point of ...departure. Good practice entails: (a) Consistent definition and measurement of overrun; in contrast to mixing inconsistent baselines, price levels, etc. (b) Data collection that includes all valid and reliable data; as opposed to including idiosyncratically sampled data, data with removed outliers, non-valid data from consultancies, etc. (c) Recognition that cost overrun is systemically fat-tailed; in contrast to understanding overrun in terms of error and randomness. (d) Acknowledgment that the root cause of cost overrun is behavioral bias; in contrast to explanations in terms of scope changes, complexity, etc. (e) De-biasing cost estimates with reference class forecasting or similar methods based in behavioral science; as opposed to conventional methods of estimation, with their century-long track record of inaccuracy and systemic bias. Bad practice is characterized by violating at least one of these five points. Love and Ahiaga-Dagbui violate all five. In so doing, they produce an exceptionally useful and comprehensive catalog of the many pitfalls that exist, and must be avoided, for properly understanding and curbing cost overrun.
Behavioral strategy in the wild Borchardt, Wayne; Kamzabek, Takhaui; Lovallo, Dan
Management research review,
08/2022, Letnik:
45, Številka:
9
Journal Article
Recenzirano
Odprti dostop
Purpose
A decade after Powell et al.’s (2011) seminal article on behavioral strategy, which called for models to solve real-world problems, the authors revisit the field to ask whether behavioral ...strategy is coming of age. The purpose of this paper is to explain how behavioral strategy can and has been used in real-world settings.
Design/methodology/approach
This study presents a conceptual review with case study examples of the impact of behavioral strategy on real-world problems.
Findings
This study illustrates several examples where behavioral strategy debiasing has been effective. Although no causal claims can be made, with the stark contrast between the negative impact of biased strategies and the positive results emerging from debiasing techniques, this study argues that there is evidence of the benefits of a behavioral strategy mindset, and that this should be the mindset of a responsible strategic leader.
Practical implications
This study presents a demonstration of analytical, debate and organizational debiasing techniques and how they are being used in real-world settings, specifically military intelligence, Mergers and acquisitions deal-making, resource allocation and capital projects.
Social implications
Behavioral strategy has broad application in private and public sectors. It has proven practical value in various settings, for example, the application of reference class forecasting in large infrastructure projects.
Originality/value
A conceptual review of behavioral strategy in the wild.
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