Strategic Management and Behavioral Economics

Eight Hidden Flaws in Strategy

The article by Roxburgh uncovers a set of essential flaws in strategic management from the perspective of behavioral economics. First, the author pinpoints the overconfidence. In the case of the need to start a new business, it might be useful, however, a person’s brain sometimes is overconfident in making decisions and assessments. For example, people tend to give narrow answers to rather precise questions like the River Nile length.

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Instead of giving an accurate answer, people miss the point. Likewise, the overoptimism goes in line with the human brain as people believe that it is exactly their business that is of “above-average” value. In this regard, Roxburgh (2003) provides three potential solutions such as wider strategy scenarios, decreased optimism, and a more flexible strategy.

Second, the flaw of the mental accounting lies in the insufficient account of investments while it is of great importance to be sure of every pound or dollar. Third, the status quo bias is expressed in the fact that people prefer to leave things as they are. The fear of something new might prevent the success of the business and even lead to its failure. Consequently, it is crucial to subject the status quo and take radical views (Pompian, 2012).

Besides, the anchoring also might be dangerous when associated with the past 2-3 years experience instead of 20-30. Roxburgh (2003) emphasizes that the sunk-cost effect appears when the business continues to invest in the project even though the initial economic case no longer holds. To avoid it, the “gated funding” and the full rigor of investment analysis should be used. Moreover, the herding instinct or the wish to match to other businesses in the corresponding field might be fatal.

Misestimating future hedonic states (level of pleasure) might be averted through the unemotional and perspective views. Finally, false consensus pitfall involving confirmation bias, selective recall, biased evaluation, and groupthink might be reduced by the creation of a culture of challenge or appropriate control of checks and balances in the company.

Are you Getting All You Can from Your Board of Directors?

Bailey and Koller (2014) provide an interview with David Beatty, a Conway Chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto’s Rotman School of Management. Beatty claims that the board of directors cannot be regarded as sinecure because of both external and internal circumstances such as social changes, market failures, and others. In this connection, the competitive environment becomes the best area for the board’s operation while the chair and CEO should take separate roles.

In order to limit directors, the interviewee supposes to establish 9 to 12 years of their performance so that the decisions of the board would be timely and innovative. What is more, the board members should develop their knowledge to remain competitive and sustainable.

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Another issue under the discussion is the company’s short- and long-term performances. Beatty stresses that short-termism is the peculiar trait of the US as the majority of other global markets are family-controlled, but there should be no contrast between the CEO and the board (Hitt, Ireland, & Hoskisson, 2015). At the same time, CFOs should pay attention to their relationships with the board of directors reacting and responding emotionlessly and independently to ensure the right decisions.

Corporate Misconduct Can Cost Outside Directors Seats on Other Boards

The article points out some changes made by outside directors in the directorship of 113 businesses in 1996-2005 to specify the director turnover. The majority of the board directors are preoccupied with legal liability, namely, the recent research showed that 83.2 percent of directors engaged in the lawsuit. Therefore, businesses involved in litigation experience failure and the shortage of opportunities.

The study illustrates that “79.2 percent of directors, who hold two other board positions lose both other directorships” (Corporate Misconduct Can Cost Outside Directors Seats on Other Boards, 2010, para. 5). In other words, there is an essential outside directors’ turnover. As a result, there is a need to implement special compliance programs that would be aimed at the prevention of corporate misconduct. In their turn, Baker and Griffith (2010) also confirm the above need stating that it could significantly enhance corporate behavior.

Failure of Corporate Boards is Ruining America

Ritholtz (2010) emphasizes that cronyism was one of the most unpleasant issues in Corporate America’s Boards of Directors. However, directors’ compensation remains in spite of corporate misconduct. This side of the corporate boards is infrequently discussed. In this connection, the author notes “Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions” book by Gillespie and Zweig and the necessity of fiduciary obligations to confirm their membership.

Underworked but overpaid boards are making a negative impact on businesses in the US while they are expected to monitor risks and control supervisors. Under the fiduciary duties in the most general form, one might understand relations that are based on trust and legal ethics arising in the connection with the corporate operation between two or more parties, usually referred to as fiduciary and principal (Gold & Miller, 2016).

In addition, Ritholtz (2010) provides his own example of working for several small companies and states that he would establish mutual funds, pension funds, and others to optimize and manage the board of directors as well as to improve the overall performance of the business.

The Real Leadership Lessons of Steve Jobs

In his article, Isaacson (2012) summarizes the lessons provided by Steve Jobs. The great success of Jobs is commonly recognized worldwide due to Apple products.

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The first lesson is focus. Focusing on four principally important products, he created a global corporation. To concentrate, Jobs learned the training of Zen. He ruthlessly filtrated everything that he considered a distraction. Simplification is the second lesson. It is undoubtedly important to make things simple so that one can see the core of the issue. In his turn, Jobs learned simplicity while playing Atari.

The lesson of the full responsibility comes next and reflects the integration of hardware, software, and peripheral devices of Apple. Jobs and Apple have taken full responsibility for their customers beginning from ARM microprocessor operation to iPhone purchase and the Apple Store. In other words, all aspects of customer service are closely related to each other. Accordin to Hitt, Ireland, and Hoskisson (2015), competitiveness is one of the paramount elements of success. Jobs completely consent to the above statement.

Moreover, he put products before profits acquiring the customers’ loyalty and expanding the focus groups. Jobs blurred barriers and created a compelling alternative reality to impute and push for perfection. To achieve such high results, he tolerated only the best players, conducted face-to-face negotiations, learned both the big picture and the details, and combined the humanities with the sciences. Finally, Jobs stayed hungry for new.

References

Bailey, J., & Koller, T. (2014). Are you getting all you can from your board of directors? McKinsey & Company. Web.

Baker, T., & Griffith, S. J. (2010). Ensuring corporate misconduct: How liability insurance undermines shareholder litigation. Chicago, IL: The University of Chicago Press.

Corporate Misconduct Can Cost Outside Directors Seats on Other Boards. (2010). PR Newswire. Web.

Gold, A. S., & Miller, P. B. (2016). Philosophical foundations of fiduciary law. Oxford, UK: Oxford University Press.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2015). Strategic management: Competitiveness & globalization: Concepts and cases (11th ed.). Stamford, CT: Cengage Learning.

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Isaacson, W. (2012). The Real Leadership Lessons of Steve Jobs. Harvard Business Review. Web.

Pompian, M. M. (2012). Behavioral finance and wealth management: How to build optimal portfolios that account for investor biases (2nd ed.). Hoboken, NJ: Wiley.

Ritholtz, B. (2010). Failure of Corporate Boards Is Ruining America. The Big Picture. Web.

Roxburgh, C. (2003). Hidden flaws in strategy. McKinsey & Company. Web.

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