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Embracing Change in the Business Landscape

Newsletter – July 5th, 2023

Embracing Change in the Business Landscape

Newsletter – July 5th, 2023

The Cost of Stubbornness: Parallels Between Warfare and Business

In April 1964, the communist North was sending troops marching down to Ho Chi Minh in the South. The CIA predicted that South Vietnam would fall within a year. The dominant theory was that a war was needed to contain communism from spreading in Southeast Asia. China had fallen under Russia’s influence; the domino effect had to stop.

“I don’t see how we’re ever going to get out without fighting a major war,” said Senator Richard Russell of Georgia to President Lyndon B. Johnson. “I just don’t know what to do,” was the reply from the President. Both Russell and LBJ had doubts if a war could be won. Both men saw it as the “biggest damn mess” they’d ever seen.

“What the hell is Vietnam worth to me? What is it worth to this country?” said LBJ. “I don’t think the people of this country know much about Vietnam. This is a terrible thing that we’re getting ready to do.”

LBJ would not be the first nor the last president to have his presidency ruined by fighting the wrong war. There was the Korean war under Truman. There was the Iraqi invasion under George W. Bush. What’s common among them is the escalation of commitment. Every administration thought that the initial skirmish could be contained as a limited conflict. But they all turned into protracted battles. What they underestimated was the pressure to dig deeper once they had skin in the game. The wars dragged on with no clear victory or viable exit.

And for LBJ, the skin had been in the game long. He inherited the commitment to war from John F. Kennedy, as well as JFK’s national security team, including people like Robert McNamara, who had previously engineered military support for South Vietnam.

I Wish That I Could Quit, but I Can’t

Economists and psychologists have written volumes of studies that describe how and why good money tends to get thrown after the bad. We harbor hope that things may turn out better; we become overconfident. Inside any organization, like that of the US government, once an established process is triggered, like war-time mobilization, the machinery simply runs its own course. And the hardest thing that prevents us from retracting is losing face. To retreat from a war means to admit and embrace defeat. No matter how many innocent lives were already lost, to pull the plug and retrench will raise a deadly question: Did those who died, die in vain? No politician can survive it.

This phenomenon isn’t unique to warfare. The same psychology plagues business and investment decisions. It’s especially acute among companies that are desperate for new growth and management teams hard-pressed by investors to turn the business around. These companies are easily seduced into putting resources into a few growth initiatives to project some strength with no plan B. Debates happen only before resource allocation. But once the initiative is signed off, managers must deliver on their promises.

But it doesn’t need to be this way. Cognitive psychologist Gary Klein talks about a technique called premortem. Executives should think ahead about what could go wrong in their project, picture scenarios where things fall apart. Where might the assumptions be wrong? Then they should figure out a way to test out those assumptions aggressively to gain insights. Sounds scary. But at the heart of this analysis is listing out what information will trigger the team to abort the mission. You can then regroup, try another tack.

You must be able to cut losses but not drag on. Understand: This is a very counter-intuitive process because our instinct is to stay on course. You need to assign someone to push you to quit. Without intervention, commitment will naturally escalate, especially with groupthink in a group setting.

That explains why so many projects slumber inside big companies, why things are not working out in the way they should. But to take resources away is to cause someone to lose face. An abandoned project is embarrassing. And no amount of psychological safety can help managers feel better about public humiliation.

I once spoke to a consumer-packaged goods company, and managers there had all the tools they needed to run different experiments. They talked about having an experimental mindset. They preached the gospel of “fail fast to exceed early.” They understood the importance of testing out assumptions.

But they used these methods to generate evidence in order to confirm the product decisions being made—not to disprove an idea. When they ran a pilot, they didn’t discuss how something might not work out, or what failure might look like. There was no clear path or prior agreement when and how to pivot. Hoping things would work out was the only plan. Ouch.

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What an honest company can do is to spell out a testing plan with contingencies. These testing plans can come in different forms, but they all pose these hard questions:

  • What assumptions, if they turn out to be untrue, will cause our project to fail?

(E.g., if attracting new users is too hard, then our product won’t have enough sales volume. Or if word of mouth doesn’t spread quickly. Or if existing users don’t keep using the product.)

  • Which one of the assumptions is most likely to go wrong?

(E.g., the word-of-mouth assumption is the most worrisome.)

  • How will you find out if the most vulnerable assumption is correct?

(E.g., we’ll run a week-long intensive referral program with generous payout incentives. We’ll only declare that our assumption is correct if each recipient refers at least two new customers who are then successfully converted.)

  • What will happen if your assumptions turn out to be incorrect?

(E.g., We’ll shut down the project if our test fails and return the unused budget to headquarters.)

The beauty of this approach is that you can have this type of conversation before making a strategic commitment. Have that negotiation before you take on the role of project lead so you have an escape latch. The mission, however inspiring, must be aborted when things don’t work out. And you need to pre-set a plan B so you aren’t seen as making things up along the way. You have an agreed-upon route to pivot on.

Pivoting, after all, is how Instagram came to life. It was once a terrible local social network application called Burbn. It came with check-in features and much else that no one was using. The app was clunky with no standout features. The founding team knew that it was doomed. So they took a hard look at what was the one thing that had potential: that users still loved it despite everything else being terrible. And that’s how they focused on the main thing—the photo-sharing infrastructure—and killed everything else. The team made social photo sharing simple. The renamed it Instagram. It became elegant thanks to the pivot. There was no point in persisting with what they’d inherited. They shed the baggage and the past. Financially. Emotionally. All of it.

Whenever politicians talk about a “theory,” it’s not infallible like the law of physics, nor the theory of gravity. Political theories are mere assumptions that keep escalating within the echo chambers of Capitol Hill. Worse, they’re untested assumptions. Call them by their true names.

The theory of the domino effect never happened. When Vietnam fell into the hands of the communists, communism didn’t spread in Southeast Asia. Indonesia, Thailand, Singapore, and Malaysia all became pro-Western. Some became democratic despite America’s fiasco. In the case of Singapore, income per capita kept rising and eventually surpassed that of the United States.

The final cost of the Vietnam war that dragged on into the Nixon era was estimated at 1 trillion in today’s terms, with 58,000 Americans killed and 150,000 more injured. The distrust left in its wake and the disillusionment with the government was so strong that it continues to haunt our democracy today.

When investing in a project, you should never imagine yourself going to war. Don’t think like a politician. It’s not just arrogant, it’s foolish. Think plan B.