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Houston research: Why business leaders should adopt a science-based approach to decision making

When business leaders make assumptions, they may overlook key factors driving desired outcomes. Photo via Getty Images

Life is full of intuitive leaps. Whenever we make a judgment or choice based on past experience, limited examples or case studies, we make assumptions to fill in the gaps in our knowledge.

Consider someone who wants to lose weight. They might assume they only need to exercise for the pounds to disappear. They attribute 100 percent of weight loss to exercise, when in reality physical activity isn’t the only variable to consider. Instead, multiple factors could be at play, including diet, lack of sleep or even an underlying health condition.

When you make intuitive leaps, you may wrongly attribute success to a single factor, when in fact many different factors may be driving an outcome. In this case, making an intuitive leap rather than considering all the factors may not lead to the desired outcome: significant weight loss.

It’s the same in business, where intuitive leaps run rampant. All too often, executives make intuitive leaps that end up derailing their strategy planning and negatively impacting business operations.

Take, for example, executives at the nursing homes we studied while researching “Focus.” The nursing homes were experiencing high employee turnover they needed to correct. After speaking with a few dozen employees, executives thought that higher pay would cut back on turnover. They had made an intuitive leap, assuming that pay was the sole driver of turnover.

When executives stopped relying on intuitive leaps, they discovered many different factors causing turnover. They started to identify, analyze and prioritize these factors, which included promotion opportunities, respect from supervisors, flexible schedules and access to health insurance. Ultimately, they were successful at reducing turnover — and not by increasing pay. Had they relied on their intuitive leap, they would have spent money raising wages with no reduction in employee turnover.

Other businesses struggle with intuitive leaps, too. Often, the problem is that individual departments believe their lever is 100% responsible for solving a certain problem, such as lackluster sales. An HR executive might believe that to increase sales, the right solution is to get frontline employees more engaged. A sales executive, however, is adamant that the company has to hire more salespeople or adjust pricing. Someone in charge of product development might say product quality needs to be improved. The chief marketing officer may believe advertising will lift sales.

Intuitive leaps are unhelpful to strategic planning. In fact, they often lead to increased silos within a company. CEOs exacerbate this siloing tendency when they call for presentations from executives across departments on how they would contribute to strategy.

To stop making intuitive leaps, executives must accept that their department alone can’t fully inform or deliver a company’s strategy. They must realize and embrace the fact that multiple factors are almost always at play. This requires humility and the ability to look beyond their own department.

For executives, the first step is to identify all factors driving a company’s strategic goal — say, increasing sales. Factors impeding sales might include having too lean a sales team, a low-quality product, an inadequate marketing campaign or even lack of distribution.

Next, executives need to determine the relative weight of each factor in impacting sales. That’s where statistics come into play. Relying on statistical analysis rather than intuitive leaps tells executives how much weight each factor has in driving sales. To build a sound strategy, executives can rank the factors and focus their strategy on the top two or three. Almost always, the top two or three factors drive 70-80% of customer value.

Decades of research have shown how these types of statistical models are better than humans at capturing and quantifying how multiple inputs connect to and inform an output. Used correctly, they can also get rid of intuitive leaps.

In one study, doctoral program admissions committee members used inputs like test scores and grade point averages to select students. Years later, when predicting students’ success, researchers compared experts’ assessments to that of a statistical model.

The model better predicted success. It assessed the data in an unbiased way, while committee members selected candidates based on intuitive leaps, bringing their idiosyncrasies and biases to bear. It’s these types of models that make for effective corporate strategy.

Microsoft is a prime example of a company with leaders that consider multiple variables with an eye for prioritizing ones that drive customer value. Prior to 2014, when CEO Satya Nadella took the helm, CEO Steve Ballmer’s acquisition strategy was seen as more reactive than proactive. Nadella’s approach to acquisition was more “forward-thinking,” and he added to the company’s focus on the cloud and subscription services. He focused on providing tangible benefits to Microsoft’s customers.

Berkshire Hathaway CEO Warren Buffet does this, too. When Buffet bought California-based candy maker See’s Candies, he rightly understood that the quality of the company’s chocolates mattered. But it’s not the only factor at play.

Unlike some executives who would make an intuitive leap that the chocolate drove 100% success, Buffet has the humility to understand the company’s success depends on much more than how its chocolates taste. Buffet knows a huge driver of customer value is people’s experience inside See’s stores.

“In the weeks before Christmas and on Valentine’s Day, there are long lines. So at 5 o’clock in the afternoon, some woman is selling the last person the last box of candy, and that person’s been waiting in line for 20 or 30 customers. If the salesperson smiles at that last customer, our moat is widened,” he said in remarks to MBA students, referring to the company’s competitive advantage. “And if she snarls at him, our moat is narrowed… That’s the key. The total part of the product delivery is having everything associated with it say See’s Candy and something pleasant happening.”

Buffet prioritized experience along with the quality of the chocolates, and he continues to do so. Since he bought See’s, the company has grown from $30 million in annual revenue to several hundred million. Humility enabled him to get rid of his intuitive leap and that drove success.

In “Focus,” we delve into exactly how executives can shift to a science-based approach to strategy to grow their business.

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This article originally ran on Rice Business Wisdom and is based on research from Vikas Mittal, J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business. Other researchers included: Jenny van Doorn and Peter C. Verhoef of the University of Groningen, as well as Katherine N. Lemon of the Carroll School of Management at Boston College, Stephan Nass of the University of Münster, Doreén Pick of Hochschule Merseburg, and Peter Pirner of Petlando, i-CEM and www.CX-Talks.com.

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Building Houston

 
 

With fresh funding, this Houston and Canada-based company has made an acquisition. Courtesy of Validere

After raising $43 million in funding for its series B round, Validere, a commodity management platform for the energy industry, has acquired Clairifi, whose technology helps energy businesses comply with environmental and regulatory requirements. Financial terms weren’t disclosed.

The funding round was closed in March and was led by Mercuria Energy and select funds and accounts managed by BlackRock, with participation from Nova Fleet, Pioneer Fund and NGIF Cleantech Ventures, as well as existing investors, including Wing VC and Greylock Partners, according to a news release.

“Validere’s mission is to ensure human prosperity through energy that is plentiful, sustainable and efficiently delivered," says Nouman Ahmad, Validere co-founder and CEO. "We facilitate this through integrating our customers’ core business with new environmental initiatives. In order to manage the energy transition well, environmental attributes cannot be managed in a silo, they need to be integrated in the day-to-day operations and commercial decisions."

Validere is based in Calgary, Alberta, and has its United States presence based in Houston. Clairifi also is based in Calgary. According to the company, the purchase of Clairifi strengthens Validere’s ESG (environmental, social, and governance) offerings.

“Companies across the energy supply chain are often burdened by the arduous task of compliance reporting, a time-intensive process that is usually performed manually in Excel spreadsheets by costly environmental consultants,” Validere says in a news release announcing the Clairifi deal. “These issues are coupled with constantly changing environmental, social and governance (ESG) policies, as well as disorganized data, which can cause confusion over meeting reporting requirements.”

Validere says that thanks to the integration of Clairifi, businesses can easily comply with current and future regulations from the U.S. Securities and Exchange Commission (SEC), and can access a central platform to accurately measure, manage, and forecast emissions strategies.

“The implementation of costs on carbon and emission reduction requirements introduce new immediate and long-term consequences that cascade from the field to head office,” says Corey Wood, co-founder and CEO of Clairifi. “While regulatory compliance is often considered a burden on industry, requiring resources and continuous innovation, if we are well-prepared, these challenges may be used as catalysts to revive, refresh and improve.”

As part of the acquisition, Wood has joined Validere as vice president of emissions, regulatory, and carbon strategy.

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