Personal Finance

Managers had better drop PowerPoint notes on securing markets

CAR

Toyota Yaris: Toyota is one of the firms that know how to compete in Kenya. PHOTO | FILE

Imagine you are on a Kenya Airways flight, sitting happily in the window seat. Beside you in the middle seat is a rather eccentric looking older man and on the aisle is a young business woman fiddling with her laptop.

As time goes on, the man turns to you both and says that he is wealthy and gets bored easily and wants to make you two a proposition.

He will give you and the business woman Sh500,000 if you can agree how to divide up the money. Rule is that the business woman will decide how much each of you gets.

If you both agree and accept, you get to keep the cash, if not, and there is no agreement, neither of you get anything.

The business woman thinks about it for a few minutes and says: “My offer is I will give you Sh10,000 and I will take the Sh490,000.” Do you take the Sh10,000 or reject the offer?

If you are like most people, you will reject it and the deal for both of you is scuttled. Why? Because the business woman is just being selfish. Yet, from the perspective of economics, that is irrational. It makes economic sense to accept anything offered, even if it is Sh100.

Turns out that if you play this ‘ultimatum game’ with real people in all sorts of cultures, all over the world the result is the same.

People do not behave like they do in economics textbooks, when they see a deal as unfair they will walk away from it, even to the detriment of their financial position. End of the day, people are emotional and irrational as the new school of behavioural economics recognises.

Traditional economics assumes people have perfect knowledge of price and markets, where eventually things reach a balance, equilibrium and all players are rational.

Allan Greenspan the former chairman of the US Federal Reserve once said: “A surprising problem is that a number of economists are not able to distinguish between the economic models we construct and the real world.”

Much of the basis of thoughts about business strategy derives from this old style thinking drawn from, for example, industrial economics. Trouble is the real world just does not work like that, people are capricious, driven by emotion.

Markets are typically unpredictable, continually out of balance, never reaching some perfect equilibrium point on an imaginary supply and demand curve found in Econ 101.

Up to say the late 1990s it was thought that there were three basic business strategies. First, was being the cost leader, in other words, being the least cost, the cheapest. Second, was to focus on a niche market and the third was differentiation, by say, focusing on quality.

Michael Porter, the Harvard Business School guru of strategy stated, in those days, that a firm had to choose one approach, it could not be all things to all people.

Somehow with the introduction of the Internet and the transformation manufacturing and service technologies, the old thinking is out the door.

Now, it is not hard to imagine a company having a quality product, or service, able to reach a niche market thanks to ICT and the web and doing it at a reasonable price.

Case in point would be Toyota cars that seem to be just ahead of you on Kenyan roads, or your high tech smart phone.

Setting a strategic direction for a company involves a wealth of variables and questions.

For example: What do our customers want, how much are they ready to pay, what about the competition, how do we reduce our distribution costs and retain motivated skilled staff ?

Ideally, a strategy process would involve diagnosis based on hard number crunching and then a plan on how to implement. That is the theory.

The reality is often much different usually involving a ‘dog and pony show’ with little or no research and diagnosis, with managers going through the motions aiming to impress the boss, with presentations that resemble ‘death by PowerPoint’ where more gut feel and emotions dominate the thinking, often leading towards taking one ‘big bet’ on a product or service.

Market leaders recognise this and know that business in Kenya is like a Red Queen’s race where you often have to run fast just to stay where you are. Having a sustainable competitive advantage is a myth, best one can hope for is a temporary advantage. So what is the solution ?

One approach is to rethink what strategy is. For instance, rather than having a single plan based on ‘big bet’ predictions about the future, one could have a strategy based on portfolio of low risk small test experiments that evolve over time.

And, when the winning experiment emerges, go with it for a temporary advantage, which is better than no advantage at all. Now that is rationale.

David is a management consultant and author of The Manager And The Red Queen’s Race. [email protected]