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May 24, 2005
Management Hubris and the "Humble Pie" Matrix
Management of a successful company has every right to be proud. Alot was invested to get there. It’s hard, and usually thankless, work with long hours and constant “payroll-to-payroll” anxiety. Finally, when management begins to see fruits of their labors and their strategy appears to be paying off and cashflow goes positive (and looks like it’s going to stay there) — a sigh of relief is audible and well deserved.
Unfortunately, this is exactly when both management and investors need to do a new kind of work which is critical to the company’s “long-term” success. It is painful and all too frequently overlooked by everyone (except your competitors) —
You must now take a cold hard look at all of your assumptions and what you perceive to be your keys to success and how you got there.
To even bring this process up is unpopular with management, and even on the board of directors. Resistence to this next step tends to be pervasive.
We VCs use the "the Humble Pie" Matrix to explain this phenomena --
it's a two by two matrix: management reasoning (correct and wrong) vs
company performance (success and failure) which means there are four
possible scenarios to consider --
Management Reasoning vs Company Performance
1) Correct | Success
2) Correct | Failure
3) Wrong | Success
4) Wrong | Failure
The classic error, made by both management and investors, is to assume that a company is successful due to scenario #1 and that competitors fail due to scenario #4
This is the natural hubris of management success —
“We are successful, THEREFORE we must be correct.” (#1)
when, more often than we like to admit —
“We are successful INSPITE of our reasoning.” (#3)
One must be constantly vigiliant not to ascribe too much validity to our reasoning based on success alone. I know it’s been tough and you have alot personally invested in those insights and assumptions you made inorder to convince yourself and others to go along with the plan and now you are just begining to “prove you are right” (Been there… Done that… ) — but this is the wrong way to look at it. You will NEVER prove whether or not you were right, and, if you let down your intellectual guard, you will certainly look like you were wrong going forward.
Success NEVER proves anything. Continued success requires to you “let go” of any conceptual frameworks which are no longer useful for effective decisionmaking — no matter how much they mattered and no matter how much you loved them. And it is love — a kind of intellectual narcissism which develops overtime. A resistence to question what has made you great. It’s human nature — which is all the more reason you need to fight this tendency to sustain a long-term competitive edge.
Remember:
<<All decisions are ultimately turn into BAD decisions>>
— since the conceptual frameworks upon which they were based lose validity over time. (As many joke: “Shorten the Bad Decision Life-Cycle” or “Keep making NEW bad decisions”)
The world is just too complex for the human mind to fully comprehend. Therefore, we must make simplifying assumptions and build conceptual frameworks simple enough to base our decisions on. But conceptual framework simple enough to be easily understood (be useful), are unlikely to be complex enough to be a “good enough” approximation of “changing realities” for very long.
“Effective Decisions” must be based upon conceptual frameworks which are —
1) Simple enough to understand (be useful)
2) Clear enough to be easily communicated to others
3) Continuously monitored with changing realities
4) Yet complex enough to be “true enough” for the “life of the decision”
While the world goes on changing around us, our conceptual frameworks do not.
<<Conceptual frameworks are static and the world is not>>
— so we must force ourselves to constantly evaluate and re-evalutate whether or not our current conceptual frameworks are still “good enough” to base “effective” decisions upon.
<< How long into our future we can make “effective” decisions based upon our current conceptual frameworks is directly proportional to the validity half-lives of those conceptual frameworks>>
We must constantly review our once “effective decisions” against brand-new conceptual frameworks which are based on new assumptions which approximate new and emerging realities.
Therefore, “effective management” requires —
<<The courage to kill your “once brilliant decision” early, by embracing new conceptual frameworks before your competitors do!>>
This is one of the most challenging tasks in the life of a company and it is especially hard for the founders to “let go” — not their management control over others — but to “let go” of their conceptual frameworks which cast a long-term deadly control over their decisons.
In summary,management’s assumptions must be constantly held suspect, ESPECIALLY when a company becomes successful, because that’s exactly the time we all let out a sigh of relief and our intellectual capital begins to stagnant and ultimately contributes to our demise. Yes, demise seems far away when you are celebrating but remember — Most “successful companies” will eventually fail and they can always track their decline back to that first day when they became a success and everyone began to relax.
Don’t let that happen to your company!
Posted by cmayaud at 11:15 PM | Permalink| Comments (3)
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Comments
I think you are exactly right. Specifically, your notion that assumptions have their individual "half life" is critical. Some may be slow (decades), some fast (months), but there is no arguing that they are changing.
Great post, Christian!
Posted by: Carlos N Velez at May 25, 2005 08:18 PM
PRICELESS!
Christian, you're worth your weight in gold! :-)
Because it's so daunting for some of us to successfully climb the "success ladder", those of us who make it may get caught up in the euphoria of success, rather than using our new found success as a preparatory step for our next, even greater success.
Thanks for this GREAT reminder, Dr. SPP! :-)
-Vincent Wright
5.28.2005
Posted by: Vincent Wright at May 28, 2005 04:22 PM
Great post!
One suggestion though: While the required complexity of a conceptual framework certainly depends on the life of the decision, I think that captures only a part of the picture. In practice, it might be more useful to focus on the total impact of the decision, of which its lifetime is only one factor - an important one, to be sure, but not always the overriding one.
Example: The head of a development lab of a global player in the semiconductor industry told me that his major challenge is to deal with shortening innovation cycles and simultaneously rising development costs - i.e. he has to make ever bigger bets on possible future products (which will be on the market earning money for ever shorter periods of time). So in his current situation, many of the decisions he makes actually have a shorter lifetime than they used to have, but neverthelss their total impact (and therefore the required complexity of a conceptual framework to ensure "good" - ok, not yet bad - decisions) is much higher.
Posted by: Herwig Rollett at May 31, 2005 04:54 AM
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