Behavioral Strategy: How Beliefs and Values Shape Strategy
The effects of behavioral strategy are observable in nearly every company, yet very few are aware of the forces that help shape an organization’s strategy and purpose. Behavioral strategy looks at these forces, such as our beliefs, biases and values that influence and shape the direction of companies.
A large part of behavioral strategy can be traced back to behavioral economics that looks at why decisions that people and organizations make may not be economically ‘rational’. One of the basic assumptions in pure economic theory is that a rational decision maker in pursuing one’s self interest will make decisions with a focus on maximizing one’s utility or profit. The rational individual displays self-control and is unmoved by emotions and external factors. Behavioral economics draws on psychology and economics to explore why people sometimes make what would not be considered ‘rational’ decisions, and why and how their behavior does not follow the predictions of pure economic models.
The same principles apply to companies. In starting to understand behavioral strategy, we should start by asking the question: what is the purpose and mission of the company? Applying the theory of behavioral economics and the rational decision maker rule, the ‘rational’ company’s mission should theoretically be to maximize its profit.
Not surprisingly, we don’t often see companies promoting ‘Maximize Profit’ as their mission. Looking at the mission statements of some well-known brands, we see that missions contain statements that portray a real social purpose and context.
Amazon: “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”
Coca Cola: “To refresh the world…To inspire moments of optimism and happiness…To create value and make a difference.”
Microsoft: “To enable people and businesses throughout the world to realize their full potential.”
Nike: “Bring inspiration and innovation to every athlete in the world.
Part of what behavioral strategy tries to explain is this deeper purpose to a company’s existence, and what are these beliefs and values that make us diverge from pursuing the pure profit maximization mandate. There are two main sources that are influencing our corporate behaviours. Firstly, are the ever-expanding expectations of societal norms and beliefs that society (and to a growing extent shareholders) place on companies such as expectations of social responsibility, fairness, ethical behavior, and environmental stewardship. Secondly are the executives and employees of the organization, and what type of organization they want to be part of and can be proud of.
Not surprisingly, when the strategy is consistent with these values and beliefs, we see stronger engagement, sustainability, and stronger business performance from organizations. Customers are also becoming more selective in dealing with organizations whose values and beliefs closely align with their own beliefs, while corporate indiscretions can quickly impact corporate reputation due to the to the amplifying effect of social media.
So next time you are sitting in a session defining your corporate values and beliefs, don’t look at it as simply a tick-the-box exercise. Understand how the outcomes of the session will influence and define your organization and its future strategy and direction. When done properly, companies should be comfortable with a strategy that aims to maximize long term value and profit while remaining true and operating within the bounds and scope of your defined values and beliefs.