Business strategy: Why we need to think like scientists
Scientists don’t make decisions based on instinct alone. They don’t rush to judgment. They create a set of assumptions, develop a hypothesis and test for validity. They use data to make informed decisions.
In the formation of strategy, CEOs should think like scientists.
During a June trip up the California coast, I immersed myself in Think Again by Adam Grant. I wore out my highlighter. The book’s implications on strategy are profound.
Grant argues that the best thinkers balance humility and confidence. When we think things through, we are more confident in our decisions. We are more likely to invest in important strategic choices, and less likely to be sabotaged by biased management team members. Data is the enemy of decisions made based on opinions alone.
Being humble translates to welcoming opinions that are different from our own. Once a scientist has reached a conclusion, they “defend” their thesis in front of a group of peers. They don’t take feedback personally. The rigor of these reviews demands that the scientist’s thinking be complete. Ego has no place in business strategy formation. Welcoming opposing viewpoints makes us smarter, and we should encourage dissent.
If you were viewing your business strategy like a scientist, you would ensure you had the following 8 data points and methods for evaluating it:
In business strategy, we try to slice our internal and external data so we can deploy resources in areas where we can achieve a competitive advantage. To do that, we need to segment our business and understand variances in real time.
For example, our profit and loss statements should clearly delineate revenue segments so we can track both sales and profit contribution for the sectors we serve. This may be by market vertical, product, category, etc. Make sure the rate of change is stated as a percentage on your P&L.
2. Market analysis
Many companies are taking shortcuts in strategy and not doing any true analysis. If your version of business strategy is to download a form and fill in the boxes, you’ll likely miss important data points.
Members often complain they can’t find relevant data, but with a little grunt work, you can uncover plenty of information from government websites like Bureau of Labor Statistics and U.S. Census, industry reports such as MarketResearch, annual reports and the like.
For example, we once worked with a Vistage member who did business with manufacturers that received products through a local port. Our firm accessed the port’s records by shipper, which indicated the shipment volume and cadence of potential prospects. When asked whether this information was valuable, the member said we had provided “the keys to the castle.”
3. Market intelligence
We see a pattern with our clients in which they report a lack of market intelligence. We recommend clients meet quarterly and review reports of public companies in their space, and compare notes on competition, price sheets and selling strategies.
One tactic is to review keywords on competitor websites, as they indicate what your competition is focused on in terms of messaging and SEO. That is also an excellent way to learn about what methods attract users to your own site.
4. A/B testing
Savvy marketers utilize A/B testing on their websites to gauge user preferences for images, descriptions, prices and promotions. Similar to a scientist testing various hypotheses, we should be collecting data in real time to understand what works and what doesn’t.
5. Internal data
You can learn a lot just by studying your own internal data. We worked with a member who sold supplies to restaurants. In strategic planning, we conducted a shipment analysis only to find that roughly a third of the client’s customers were completely unprofitable. The company intuited a delivery minimum, which effectively fired the bottom 10% of customers — volume that was offset by higher purchases from other customers. The company’s gross profit went up an entire point the following year.
6. Financial projections
Projecting financial revenue and profit for three or more years is crucial in the formation of strategy. By tracking SG&A, a company can better game-plan which positions to fill and investments to make in technology and automation. Capital improvements are not something you can plan quarter to quarter.
The Vistage Research Center is a rich resource for data. Joe Galvin, Anne Petrik and the entire research center personify what it is to think like scientists. During the pandemic, The Wall Street Journal/Vistage Small Business CEO Survey was widely used as a barometer of business activity.
It is useful to benchmark results against other companies in similar industries and of a similar size. CPAs often have access to financial benchmarks for purposes of comparing financial ratios.
Having the right key performance indicators is critical to a company’s success. However, many employees don’t trust the validity of numbers they use.
One issue with KPIs is that they are often internally focused. There are external sources such, ITR Economics, which provide predictive indicators at each Vistage Executive Summit. Good KPIs balance leading and lagging indicators.
Most importantly, we need to promote divergent thinking in our organizations so we can achieve convergent thinking. This requires a diverse range of people on a management team, capable of thinking like scientists.