Why we’re all prone to bad business decisions (and what to do about it)
The Saddest $5 Billion Deal in Tech History
Yahoo’s sale to Verizon in June this year has been called the “Saddest $5 Billion Deal in Tech History”. While hilarious, this quip is also super fitting given the tech giant’s once proud domination of the Internet landscape. This sale was the punchline of Yahoo’s lumbering descent into ignominy, and mercifully ended a horrendous streak of bad business decisions. Within just the last decade, Yahoo’s melancholy record includes:
- Spurning a $45 billion buy-out offer from Microsoft
- Acquisition and subsequent bungling of growing websites like Flickr, Geocities and Tumblr
- Hiring the light-on-experience Marissa Meyer as CEO in a desperate bid to revamp the business, with little real impact
And the less said about Yahoo’s refusal to buy Google for $1 million in 1998, the better…
So why did Yahoo’s leaders make such bad calls? Is it because they didn’t have access to expert advice or necessary resources? Was there not enough data and insights coming from Yahoo’s 200 million unique visitors per month to give them an inkling into what was going wrong?
The Dangerous Assumptions We All Rely On
Yahoo’s leaders may have had access to everything they needed, but I believe that their leaders systematically bypassed the evidence and made their decisions based on faulty beliefs and half-truths. This is not a fault isolated to Yahoo’s execs; bypassing evidence is a core tenet of being human (just ask any anti-vaxxer out there). This is because it is cognitively easier and faster to act on available assumptions.
In the business world in particular, our drive to act quickly leads us to rely on assumptions, instead of carefully considering what the evidence is telling us. If you need proof of this drive, just think how we elevate people who act with speedy “intuition” or “nous” to the highest leadership positions. When have you ever heard of a business leader being praised for their methodical decision-making?
Whether we like it or not, this intuition that we so admire relies heavily on the following crutches:
- We should do what they’re doing, it’s worked for them!
- We should keep doing what we’re doing, it’s always worked before
- We know this works because everyone knows it works
These assumptions all lead us into a dangerous territory. In the first instance, you could copy WHAT another successful business is doing, but that doesn’t answer the question of WHY it is working for them. Yahoo tried to emulate Google’s innovative practices by acquiring over 53 start-ups under Marissa Meyer’s leadership. But this expensive strategy failed to appreciate that it was Google’s underlying culture, not the businesses they acquired, that was powering their innovation engine.
Similarly, when you assume future success based on past success, you may miss how a changing environment will affect your business. Yahoo refused to buy Google in 1998 because they wanted to keep all users on their platform, which provided an all-in-one email, online store, video game and directory service. Yahoo even had a basic search function. This tactic had always worked for them previously; the platform did exceptionally well in the 1990’s. But their decision to pass on Google was blind to the evidence that consumers were beginning to demand specialised websites for each of these specific functions.
As far as following what is just ‘known’, our shared societal knowledge has a shoddy record of holding up falsities as gospel truths. Conventional wisdom has previously upheld that experts can beat monkeys at the stock market (they can’t), that more college graduates causes a bigger economy (it doesn’t) and that monetary incentives result in greater work performance (they don’t… well, not always). It is easy to draw on things that are just ‘known’ to support your decision, but it can be a risky crutch to reach for.
Making Better Decisions (A Starter Guide)
1. Seriously Commit To Data-Based Decision-Making
The first defence you have against poor decision-making is data. Assuming the data is relevant and reliable (and you should make sure that it is), the insights it produces provide sound evidence for business decisions, devoid of hunches, feelings, or politics. A commitment to data-driven decision-making ensures you are being guided by hard truths about what will and won’t work for your business.
If you’re a start-up, the age of technology is your friend. It has never been easier to track your customer behaviours, monitor industry trends and create feedback loops with your audience. The most valuable insights for your start-up will come from ‘thick data’ — being the data you get from in-depth conversations with your consumers, which will provide information about their behaviours, their perceptions and their preferences.
For more established businesses, the aim of the game is to identify what your performance goals are, and what data will indicate how well you’ve done at fulfilling those goals. Always be building data gathering mechanisms that will collect that information, and have processes in place for making use of those insights. If there is no evident way to gather the data you want at the time, flag it as a ‘to be continued’ and keep it in mind until a solution is found.
At the end of the day, your data is only as useful as its quality and objectivity. To ensure this, make sure you’re always asking yourself:
- Is this data reliable? Alternatively, does this data have a skew or bias?
- Is this data relevant to my business?
2. Always Be Testing
There’s no shortage of things you can try when building a business, but you should always give yourself the best chance of finding the right strategy. When you’re moving into uncharted territory, you have to combine equal parts intuition, previously gathered data, and methodical testing to identify the best course of action. Once that best course is identified, you can start committing your (often limited) resources to tactics that have now been proven to work.
One way you could approach testing is via hypothesis methodology. In this scientific framework, you brainstorm potential solutions to a business problem, choose several hypotheses you want to test, and design tests that will produce comparable results in experimental conditions. For example, there are over 20 major communication channels for marketing a product, but only a few of these may be right to reach your target audience. You might hypothesise that Facebook Advertisements will be more effective than LinkedIn Advertisements for converting your target audience into signing up to your mailing list. The best way of finding out is to run similar messaging to similar audiences across both channels and track all traffic and conversions within a set timeframe. It’s not rocket science, but it is something that surprisingly few businesses do.
Investigations like this are, at times, a little more art than science. But a commitment to rigorous testing will provide hugely valuable insights into what the most effective tactics for your business are.
3. Be Prepared to Challenge Conventional Wisdom
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Widely attributed to Mark Twain, but there is no evidence he ever said this
While the advice “be prepared to challenge conventional wisdom” has pretty much become conventional wisdom, I choose to ignore paradox in the face of plain good advice. Conventional wisdom is undoubtedly important: It provides a solid survival guide to lots of everyday situations (an apple a day keeps the doctor away, look both ways before crossing the road, if the trailer’s rockin’ don’t come a’ knockin’, the list goes on…).
But it’s important to remind yourself every now and then that conventional wisdom is often based on nothing more than anecdotal evidence. If your data is telling you something that goes against the tide of public thought, listen to it. If you catch yourself deciding based on something that is just ‘known’, investigate that claim. Set yourself up to challenge conventional wisdom and it will guard you against making decisions based on half-truths. This might be the difference between following a well-trodden path into ignominy, and breaking from the norm into fertile new territory.
(The first half of this piece borrows heavily from Jeremy Pfeffer and Robert Sutton’s work on Evidence-Based Management. I highly recommend the read!)
