Robust, competitive markets force participants in those markets to learn how to serve their customers in more efficient, cost effective ways, or else they risk going extinct. In our own experience, however, Fisher has found that companies can sometimes fall victim to “inertia” – a tendency to do things over and over in the same way, which is often driven by biases that we all have as humans. For example:
Confirmation Bias
Managers create reports and analyses that place more importance on data that confirms what they already believe (or what they have previously told their boss and colleagues). In a due diligence study, we were asked to confirm the positive market growth rate for currency paper. In the end, we came to the opposite, yet correct, conclusion. The root cause of this difference was management putting too much emphasis on historical factors that drove demand, and not enough importance on disruptive technologies (cashless systems) that were rapidly gaining popularity.
Experience Bias
Sometimes, we put a disproportionate amount of weight on our own experiences and suppositions. When I started at Fisher, I did not have a single customer during the first year and so I cold called a lot of prospects. During that year, I had three separate mill managers tell me that they did not need cost benchmarking. Why? Because each of them was “sure” they were the lowest cost producer in North America, even though they were all making the same product grade! While at Longview Fiber, I had the opportunity to work for Randy Nebel (now, the CEO of Verso), who is a staunch proponent of benchmarking and utilizing external data and expertise. He often quoted Jack Welch, saying, “If change is occurring on the outside faster than the inside, the end is in sight.” Benchmarking, and sharing the results with all employees (including union), served as a catalyst for transformational change that took place at Longview and helped to revitalize the company.
Figure 1: As this cost curve of European testliner demonstrates, mill costs can vary dramatically for the same grade in a given region.
Principle-Agent Problems
Many companies use agents, distributors and other intermediates that can have different objectives than they do. We once completed a proprietary study in which we found that a country agent for a company was advising them that the market was half the size it actually was in order to represent the other half for their competitor! The agent was changed, and in doing so, the company doubled their addressable market.
Figure 2: Illustration of utilizing the mapping feature in FisherSolve Next for territory management of pulp sales agents. Pulp sales optimization is usually a large source of opportunity for most companies.
Recency Bias
Managers will sometimes put more weight on recent or current events than on historical trends. We see this frequently, particularly with customers who withhold capital expansions during downcycles, which can often cause them to miss out on future gains when the market turns up.
The remedy for corporate inertia is to root out the biases that lead to incomplete decision making, which takes a cultural embrace of the power of unbiased data. In our own experience (and based on the work of many others), there are some simple things your organization can start doing right away to incorporate this kind of change:
How do you know if your company has the qualities of a winning analytical company? Here is a simple checklist to go over:
These common mistakes can be easy to miss when you’ve become comfortable with the routine you’ve set in place for yourself and your company. However, it’s crucial to self-reflect on how some of these habits could be potentially hurting your business strategy in the end, which will allow you to make the necessary changes that are vital to your company’s profitability and position within the market sooner rather than later.
[1] Competing on Analytics, The New Science of Winning, Davenport and Harris, page 74.