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We know that cognitive biases affect nearly every decision we make, and in the world of
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business, people need to make important choices every day.
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Often these choices must be made without delay and have broad, far-reaching consequences.
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How can we make sure that our choices remain rational and objective and free from our potentially
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harmful cognitive biases?
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As it turns out, there is a system, but it's a lot more like a process or a habit than
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a magic bullet.
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New research has shown that the world's best managers can overcome biases and reliably
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make effective decisions by following an approach called diligence-based strategy.
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Doing business in the 21st century isn't easy.
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No matter the industry, most organizations will eventually face a crisis: maybe new competitors
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will appear out of nowhere or an existing brand will try to carve a slice out of your
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customer base.
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Today's competitive conditions are forcing organizations to strategize and act quickly.
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Thus it's easy to see why many companies scramble to create a revolutionary new strategy
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to cope with crisis -- conducting market research, analyzing trends, and evolving the core business
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model.
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But this is the wrong approach.
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Following the traditional “big strategy” approach leaves room for more errors in judgment,
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particularly during a crisis.
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Instead, organizations should rely on diligence-based strategy by turning their attention to a small
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number of ordinary business activities -- like sourcing inputs, managing customer relationships,
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and developing the right people.
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Diligence is about focusing on the fundamentals.
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By optimizing their operations, organizations can promote the conditions that allow for
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better, more thoughtful, long-range strategies to emerge inductively.
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Developing diligence requires a different type of thinking.
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The best executives attend relentlessly to what they can control.
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They rely more heavily on measurement and empirical evidence and less on opinions or
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persuasion.
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Think of baseball executive Billy Beane, who set a famous precedent by using advanced statistical
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analysis, overthrowing the more traditional methods of evaluating baseball talent.
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The “moneyball phenomenon” has motivated a new surge of interest in optimization -- many
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companies now find that big data can reliably inform their decision-making.
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As an executive, your primary task is to know the levers that drive business performance,
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and to pull those levers.
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To identify fundamental activities, ask yourself this: does mastery of this activity contribute
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significantly to the performance of the company?
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And can the activity be reliably measured and monitored?
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Companies should only have a handful of fundamental activities -- like “sourcing inputs,”
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“managing the supply chain,” or “serving customers.”
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It is only after isolating the company's fundamental activities that the work of optimization
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can occur.
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Most importantly, managers should use every available technology and data source to compile
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information on the company's activities.
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It's easy to go astray when decisions are made based on emotional responses or incomplete
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information -- which are a natural occurrence during a competitive crisis.
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Diligence-based strategy allows companies to systematically focus on what matters most:
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improving the fundamental operations that lead to success.
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To find out more about diligence-based strategy, decision-making in organizations, and cognitive
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biases, please read California Management Review's special issue on Behavioral Strategy,
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Volume 59, Issue 3.