• A place for evidence-based strategy?

    Posted on February 24, 2012 by in Evidence, Strategic analysis
    Evidence-based strategy

    Evidence-based strategy

    Evidence, experience and assumption

    The traditional view of growth and profitability is that they both tend to rise over time. There will be fluctuations due to the economic cycle, but overall business and investment decisions are based on an assumption that economies will continue to grow and, therefore, so will the opportunities to generate profit.

    10 years ago, it was accepted that most companies, organisations and countries had to adjust to the trend of globalisation. This was driven by the availability of relatively cheap labour in developing economies with large populations, such as China and India. The resulting trend in the developed economies was to outsource manufacturing and low value services to these countries and concentrate on research, design, and high-value services. We now hear questions about many of these assumptions that have held sway for the last 10 years.

    Globalisation is no longer accepted as inevitable; corporate governance and the division of wealth are being called into question in some mature economies. The debt crisis in Europe continues to cast a shadow over the banking system and could still see the Euro disappear to be replaced by national currencies once again. Another important and widely held view that existed from the 1980s until very recently, was that economic policies in the developed economies had eradicated the “boom and bust” problems, which had been a feature of capitalism throughout the 19th and 20th centuries. As well as believing that government policy had tamed macroeconomic fluctuations, the explosive success of innovative financial services products such as derivatives was seen as another contributor to sustained GDP growth. With the benefit of hindsight, we can now see that neither the mechanics or the risks of these instruments were understood, either by regulators or the boards of the banks that created them.

    In this low-growth yet unpredictable environment, most companies with high-growth goals or an imbalanced group of businesses find diversification essential. Inevitably, this leads to rise in merger and acquisition activity. Unfortunately, the growing body of evidence shows that many mergers destroy and not enhance value.

    So, what can we conclude from all this?

    There is an aspect of human behaviour that leads us to believe everything is all right, as long as other people say so. We are also able to convince ourselves that we, our products, or our organisations are special somehow and, therefore, immune to the problems that others face and experience. Together, these tendencies when played out on a global scale lead to the problems described above. “Groupthink” about the vast economic potential of the Internet, contributed to the dot-com boom. Assurance that everyone else was okay with the ever rising tide of household debt in the developed economies from the 1980s enabled most of us to ignore the lessons from the many previous debt fuelled bubbles that have occurred. Maybe a responsibility of a strategist is to recognise our tendency to irrational behaviour and look for evidence before blindly following the crowd?

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