This is how you know if your management is listening

A colleague sent me this opinion piece from CNN, titled, “There's a cheap, proven fix to the world's biggest problem.” As an economist, he asked, what do you think of it?

I thought it was a bad piece of economics, and I told him that. But the title was fantastic- more Business- Insider-like than CNN, but then CNN is fighting to survive, so it’s excusable.

The piece describes how an economist is trying to get an initiative (dubbed Initiative-732) to pass in Washington State which will tax carbon emission but make the higher taxation “revenue neutral” (from the government side) by giving back equal tax breaks.  The idea of “revenue neutral” is controversial - the consensus today is that it often ends up damaging the economy, not being neutral at all, as it taxes and distributes back to different segments.  

But what makes this truly bad economics is much more fundamental.

At the basis of every bad strategy there is always one really bad assumption.

This one is a classical blind spot:  The initiative rests on one, crucial, and wrong assumption: Raising the price of bad behaviors arbitrarily will make people change their choices by making these too expensive while simultaneously (and miraculously) making alternative, good behavior more affordable.  In other words, government can steer people away from their market based (“bad”) choices at will, and it is so simple!

Sure, and the war on drugs – which makes drugs so expensive- is a huge success and making Oxycodone expensive sent people to much better alternatives, like, hmmm.. heroin. It’s so easy. Government  can solve every problem this way. All we need is to believe in Harry Potter!

The author of the CNN piece believes so deeply in the goal- cutting bad emissions – that facts are at times in his way. This is normal. We all do it. He claims the proposal enjoys support from economists on the left and on the right. Naturally, I looked up Cato institute (the best economic think tank on the “right”), and they slammed this proposal galore as bad policy. The author further claimed the great success of a similar measure passed in British Columbia in 2008, which he argued gave it a big economic boost. The Cato’s piece makes it clear this is not the truth. Some point to BC’s economy lagging relative to the recovery in greater Canada.

But the worst part was the casual play with logic: if the measure is a great strategy to fix a bad problem, we would see a sustained drop in consumption of the bad fuels, right? Well, it didn’t happen in BC and it won’t happen in Washington State.  

What’s missing from this bad strategy?

Simply and clearly, the perspective of those affected by the measure, and therefore, their predictable response. Turns out, drivers don’t drive less, people still heat or cool their houses and all that is captured by a simple measure called elasticity, which measures responsiveness to price changes. The lower- the less response. Turns out – and every economist knows it - elasticity for gas is very low.

Economics is the science of human action (see here). Elasticity captures the answer to the question: How do people act? Economics doesn’t ask why people act the way they do. Psychology is the science of ‘why’. Behavioral economics tries to combine both. In the case of the misguided British Columbia’s policy, it is now clear that the vast majority of BC residents, after the initial shock, had no choice but to shift more resources into gas purchases, and spend less on other needs. Behavioral economics would explain to those academics and sheltered politicians in favor of Initiative 732 that what sounds good in theory, doesn’t sound good to those who actually need to go to work and heat their houses. That’s why the Australian government rescinded a similar measure quickly after a public outcry over spiking electricity bills, and why gasoline purchases in BC, after an initial drop, went up again. They are higher today than when the tax was imposed!

Ironic, isn’t it?

The assumption that your strategy will work because the goal is great, or because you just know it will be good for your company, country, or planet, is a pervasive assumption.  In my presentations to executives on competitive intelligence I explain why this pervasive error is exactly the reason they badly need real competitive intelligence (rather than the current data-fetching circus).  

Sometime they get it.

You win. What now?

Many of my clients think, erroneously, that the value of competitive intelligence is solely in the “facts” it brings forward. These facts, they say, will make for better decisions.  But this is not the reality in many companies. Many managers consume information not to make “better” decisions but to confirm their existing perspective. This is the “good to know” mode of information use. Good to know doesn’t change decisions, doesn’t change perspectives, it’s as I pointed out here, just “stupid” work. It has little value.

So what is the hidden value of competitive intelligence? To understand this subtle, and yet most powerful effect of real CI, we need to turn to..  couples therapy. Read this article reporting on research into arguments between couples. In a fascinating study, researchers found that real couples arguing about “hot issues” were able to better resolve their argument –regardless of who won the argument- with one sentence: "I see where you're coming from."

That such a sentence is so powerful is important to understanding the hidden power of real CI. Evidence suggests that introducing explicitly the perspectives of other parties (competitors, customers, consumers, regulators, payers, disruptors, etc) makes for superior predictions and therefore decisions. It doesn’t matter if one agrees with the others’ perspectives. What matters is that one’s thinking is affected by listening to other parties’ perspectives.

A dialogue of intelligence producers with intelligence users is just about that- clarifying, elucidating and powerfully presenting third parties’ perspectives.

Last year, Novartis’ launched its new heart medication, Entresto, which was supposed to be a huge blockbuster. So far, the launch failed miserably in the US. Apparently, the launch team failed to anticipate the resistance of payers and doctors to new high priced drugs, regardless of the clinical evidence of its effectiveness and the pharmaeconomic argument that it saves on overall health cost. I guess you have to live in the US to understand the current climate against Pharma. Switzerland may be too far away?

Anticipating others’ perspectives is - and will always be- one of the main – if not the main- factor behind strategy’s success and company’s performance. Do you understand why real intelligence is so crucial?

So simple, so powerful, so absent in both politics and business.

I feel sorry for residents of Washington State if the initiative passes…

I teach real competitive intelligence skills at the FGH-Academy of CI, www.academyci.com. For my state- of-the-art slideshare on designing the winning CI program, click here.