Business strategy: how we mistake ignorance for intuition and deceive ourselves

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Special material for Lifehacker from Dmitry Lisitsky, CEO of the International Center for Internet Trade, about the influence of intuition on management processes and decisions.

I was prompted to write this column by this picture that I saw on Facebook:

I immediately decided to see who it was that undertook to talk so frivolously about strategy? The page turned out to be filled with cute nonsense, so I didn't want to join the battle in the comments. Nevertheless, this picture is a great illustration of a common misconception that I - an inquisitive person - wanted to deal with.

Intuition malfunctions, its use is detrimental to business

It is widely believed that intuition is a magical property of a person that allows him to get answers to difficult questions instantly. Some even view intuition as a spiritual concept. In their opinion, a person, with the help of intuition, receives answers directly from God, the Universe, aliens - in a word, from a higher mind. This is a very convenient belief: when solving a complex problem, it is much easier to trust your intuition than to engage in lengthy calculations or tire yourself with painful reasoning that has become disgusting since school.

Intuition is a handy tool, but you need to be able to use it correctly.

When a person is faced with a problem, he automatically looks for a ready-made solution in his memory and, if one is found, is lazy to think about an alternative. We don’t need to think hard about how to get food out of the refrigerator, how comfortable it is to sit on a chair, or what happens if we touch a hot iron: we found these solutions as a child and use the results of our previous experience.

Cognitive psychologists call this thinking the first system, and the work of the brain, when we seriously analyze something, the second. It turns out that, when we first encounter a problem, we use the second system, and when she understands the problem, the solution is stored in memory and we move on to using the first system of thinking.

Anyone who has learned to drive a car knows how hard it is at first: you squeeze the clutch with one foot, then press on the gas, then on the brake with the other foot: the main thing is not to mix it up, the left hand turns the steering wheel, the right hand switches gears, you need to monitor the traffic situation, signs, remember the rules of the road. A nightmare for the second system. But literally in a year or two we do it, simultaneously chatting on the phone or listening to music, because the first system is already working.

This example illustrates the main property of the first system: it produces solutions instantly and without effort, and that's why we love to use it so much. But this is not without failures.

Daniel Kahneman and Amos Tversky were the first to study this phenomenon. At a congress of mathematicians in Jerusalem, they wondered how well people have developed statistical intuition. Having tested their colleagues, specialists in mathematical statistics, they were shocked by the results: even professors of mathematics with many years of experience were easily mistaken in answering simple questions in those cases when they answered without hesitation, intuitively.

Unlike, for example, linguistic intuition, the ability to speak a native language without studying its rules, statistical intuition is not inherent in people.

Since then, psychologists have seriously taken up the question of why the first system of thinking fails us. It turned out that there are many such failures and we face them every day.

Let me give you an example that is familiar to every leader. How is it customary to develop business plans today? Graduates of business schools, having taken courses in financial planning, statistics, corporate finance and other important disciplines, as a rule, do not apply this knowledge in practice. Instead, in forecasting, they use the indicators of past periods, their growth rates, intuitively thinking about the following: 5% growth is safe, but they will not be praised for such forecasts and may even be kicked out, 20% is aggressive, but there is a prospect of promotion. At the same time, the real situation in business, market conditions, new points of growth are not taken into account!

The problem with this logic is that it excludes the possibility of a fundamental change in the business model, and hence a noticeable business growth. It's much easier to keep doing what you already do. There are times when the market conditions change so that the figure of -5% is considered very optimistic. But the manager, without having done enough analysis, promises the management + 10% and loses his job, not reaching the promised indicators.

Let me give you a fresh example. This year I had a very difficult discussion with a number of Allbiz sales managers. We were just discussing the changes in the sales system, which was caused by a qualitative leap in product development. And then it turned out that the goals we set for ourselves look unrealistic in the eyes of some leaders. When I asked why these goals seem unrealistic, there was an "iron" answer: "We have never achieved such indicators." In their opinion, + 5% we can try to do, but + 100% is impossible.

Now this episode is funny to remember, because some offices already in July reached performance indicators that were supposed to be obtained only by 2017. We all miscalculated then, relying on intuition. The main argument on my part in that discussion was simple: “That's why we want to change the sales system because we need a qualitative leap forward. Why even discuss changes in the sales system if we do not plan to qualitatively increase its efficiency?"

An intuitive sense of numbers is the most dangerous thing.

Why counting retentions is more important than customer churn

Let me give you another example, but first think for a moment, is this a lot, 10%?

We monitor the churn of customers very closely after the expiration of the first contract. Alas, this is a very large figure: a year ago 85% of clients did not renew their first contract. The reason for this high churn rate is clear: sellers promise something great and get paid for it. But when clients face the reality and understand that they need to independently manage the quality of the listing and turn the lead into a customer willing to pay, many are disappointed. It is interesting that those who renew the contract, as a rule, stay with us forever, having learned how to effectively use our system.

What's interesting is that financiers looked at these numbers and were shocked by the high churn rate. Moreover, over the year this indicator, in their opinion, has improved insignificantly, having decreased to 75%, in fact by the same 10%. Curiously, repeat customer revenue has skyrocketed. How did it happen that a small change in outflow resulted in a significant increase in income?

Let's calculate the same metrics in terms of retention. A year ago, we kept 15% of first years (100% - 85%), now this figure has grown to 25%. This is a more sensitive difference to our intuition, isn't it? Now let's divide 25% by 15% (can you feel how lazy your second system has turned on and how tedious it is to understand these numbers?). Having done these calculations, we will get the growth rate of + 67%: this is exactly how much the income from repeat customers changed!

The question arises: which is better, to take into account the churn of customers or the number of retentions? The churn rate characterizes the lost income that we could have received if we worked harder on retention. The retention rate shows the level of our income growth. However, was it really possible for us to get those lost revenues that are characterized by outflow? I doubt.

Collect and analyze data. Don't be lazy

If we analyze the reasons why the client leaves and does not return to the site, then there are many of them. Some of those who left do not have an established sales process in their company, and therefore the received applications and calls remain unprocessed. Someone does not have a well-established call-tracking evaluation system, as a result of which the client does not understand where the call from a potential buyer came from, and considers work on the all.biz site ineffective. In some companies, a leader has simply changed who does not want to delve into the situation. I don’t think we could keep such clients, it’s a natural churn. By the way, many of them come to us again when the internal processes are in place.

I think it is much more useful to analyze retention, which is directly related to income, and it is important to look specifically at the rate of retention growth: if retention is at the level of 2%, there are such businesses, then 2% growth is a doubling, although for our intuition 2% - negligible value. Will you queue up for a 2% discount? I doubt.

How to avoid mistakes? Do not be lazy to include the second system when making important strategic tasks. You need to have real courage to say: "Stop, why do we think that this is exactly the case," even if the question works like a stop-cock of a train flying at great speed.

We often call decisions intuitive, which we make without thinking, and this, of course, is not intuition at all, but simply our laziness to think again.

Many people will say that in an offline business there is much less data for analysis, so many decisions have to be made intuitively. However, there are many points of entry for analysis here as well. Some of them are: purchasing dynamics, brand awareness, image indicators, changes in consumer preferences. Moreover, modern technologies have sharply reduced the cost of such studies and increased their accuracy, you just need to not be lazy to collect and analyze data.

For example, many advertisers from FMCG calculate the advertising budget based on the acceptable level in the cost structure and its profitability, which is logical, but at the same time, goals for the growth of image indicators are "drawn" intuitively. In fact, a simple econometric model makes it easy to link advertising costs and changes, such as spontaneous brand awareness. Such a model predicts quite accurately which goals for the growth of knowledge are realistic, which are ambitious, and which are absurd. More than ten years ago, during my tenure at Starcom, we successfully designed such models for demanding clients.

So, we admit to ourselves that intuition deceives us and cannot be trusted with serious decisions. You should not be lazy to ask yourself: "Why did I make this decision and did I use all the available data?"

I think, after reading this article, some will be outraged why I even call the first system of thinking intuition. In fact, I'm not the only one who thinks so. We all often call decisions intuitive, which we make without hesitation, and this, of course, is not intuition at all, but simply our laziness to think again. But, of course, there is also an intuition of a different order, the one that reveals secrets to us and helps us make breakthroughs. But this is the subject of a separate article.