How to avoid the ego-traps in big moves

Paul Strebel & Anne-Val   |  Wed, 10/08/2008 10:33 AM  |  Management

Over-confidence is a common trait in successful ambitious leaders. Success breeds confidence. But does confidence breed success? Some companies have paid a high price for the self-esteem of their top people.

The major disasters in the recent and ongoing credit meltdown, at banks like Citigroup, UBS, Merrill Lynch and Lehman Brothers, can be traced back to the firm controlled by a dominant personality, a docile top team and boards with a glaring lack of financial expertise. Obviously, the blame can be shared: with regulators and rating agencies that didn't do their job properly, risk managers who didn't raise the red flag high enough, the Federal Reserve that threw money at the party, and the yes-men that made up a majority of those boards.

This is hardly the first time that the banking industry has had a melt down. Financial crises hit Mexico in 1994-1995, Asia in 1997-1998, Russia in 1998, and Argentina in 2001. The lessons from these crises had little impact as five years later it all went wrong again.

Over-Confidence and Success

Jack Welch once said: "Oh hell, everyone in this game has ego. You have to have self-confidence to seize the opportunities." A few years later, he confided, "My hubris clearly got in the way in the Kidder Peabody deal. I got wise advice from Walter Wriston and other directors, who said, *Jack, don't do this.' But I was bully enough and on a run to do it. And I got whacked right in the head."

Successful, ambitious people achieve positions in which they encounter many temptations and enjoy the power to indulge their urges. They can construct masterful rationalizations to persuade others - and themselves - that what they're doing is right. Research shows that such people have higher opinions of themselves than do their observers. All of this makes them prone to hubris - underestimating the challenges and overestimating their abilities.

What we have found in our observation of the smart and stupid moves made by companies over 15 years, is that leadership egos most likely get out of control when companies make big moves, the ones that will make or break them. Making big moves requires concentrated doses of leadership ambition and self-confidence, which open up ego-traps created by hubris.

Five Big Moves and Ego-traps

There are five classic types of big move - strategic shifts involving a large commitment of resources to a new goal. However, for each of the big moves, a related ego-trap often gets in the way of rational decision-making.

Finding a new game is about creating an entirely new business model to replace an existing business that is dying, or taking advantage of a new technological or market opportunity. Those trying to find a new game often think they can run any business -all they need to find is a great opportunity. They fall into the trap of opportunistic hubris - we can seize any opportunity, run any business.

Going for growth is about rolling out a business model that works, developing the resources needed to adapt the value proposition to new markets and riding the growth wave. Those going for growth often overestimate their understanding of the market and believe they know what the market wants. They fall into the trap of inside-out projection - we know what customers need.

Getting back into shape is about reducing costs by increasing the efficiency of the value chain of activities and enhancing the value proposition through the way it is produced and delivered. Those trying to get back into shape often believe they are doing better than they are, in a state of denial that anything is seriously wrong. They fall into the trap of narcissistic denial -we're the best, there's nothing wrong with the business.

Re-launching growth is about increasing revenues by re-designing the value proposition and/or adding new lines of business to serve well-defined growing markets. Those trying to re-design the value proposition to re-launch growth, often believe they can emulate and beat successful competitors at their own game. They fall into the trap of me-too imitation- we can beat the competition no matter what they do.

Restoring profitability is about turning around loss-making activities by re-focusing the business model on the core money-making parts of the business. Those trying to restore profitability often believe they can avoid the pain of restructuring by growing their way out of the problem. They fall into the trap of raising the stakes - we never admit defeat, we always move forward.

Avoiding the ego-traps

Calling for greater self-discipline, exhorting executives to be open to facts that don't fit their preconceptions, or creating time in their agendas to see, hear and understand what's going on, is futile. The adrenalin and energy needed to drive big moves make it almost impossible to calmly weigh the risks involved. More pointed checks and balances are required.

The most effective antidote to the ego-traps is sparring partners with sufficient personal and institutional power to block big moves that don't add up in terms of their strategic logic. The banks that did best in avoiding the sub-prime crisis had boards of directors with clout and significant experience in financial services. But, it's also about having to listen to the right people at the right time. Each of the move calls for a different approach, just like each move is subject to a different form of hubris.

Detailed examples and analysis of the five types of big move and the strategic antidotes to the ego-traps can be found in the authors' new book "Smart Big Moves: The story behind strategic breakthroughs" published in June 2008. The book looks at the smart strategy, smart execution as well as smart psychology.

Paul Strebel is Sandoz Family Foundation Professor and Strategic Change Management. He is Director of the High Performance Boards program. He also teaches on the International Seminar for Top Executives, the Program for Executive Development and the Orchestrating Winning Performance program. (www.imd.ch)

Anne-Val*rie Ohlsson is a Research Associate at IMD. Her expertise is business strategy, visioning and entrepreneurship. (www.imd.ch)

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