Ideas fuel business. They drive how we respond to customer problems and leverage market opportunities. The right idea can make a business work and, over time, our successes become ingrained in our mental models. The opposite is also true. If we begin with the wrong mental model, important problems become impossible to solve.
Consider the labor participation rate for prime working adults, which despite the recovery is still three points below where it was in the 1990s. Some believe that people aren't working because they lack incentives. But the evidence shows that the problem is more rooted in the opioid crisis and high incarceration rates.
Clearly, if you believe that a lack of incentives is the root of the problem, you'd want to adopt "tough love" policies like making cuts to the safety net. However, once you understand that incarceration rates and opioids are the cause, you can start making an impact. It works the same in business. The right mental model can push you forward, the wrong one will end badly.
How We Build Mental Models
Our worldview is mostly backward looking. We see, hear and do things things and then pack these experiences away in our brain as connections called synapses, which develop over time. These connections strengthen as we use them and and degrade when we do not. Or, as neuroscientists who study these things like to put it, the neurons that fire together, wire together.
Once these become hard-wired, they are very difficult to undo, because we tend to see things through the lens of the mental model that our synapses create. So if you think that people aren't working because they're lazy, you would attribute opioid abuse and incarceration to personal shortcomings, rather than to problems with medical practices and sentencing guidelines.
Our mental models are further reinforced by the people around us, who tend to have similar experiences and therefore similar mental models. In fact, a series of famous experiments showed that we will conform to the opinions of those around us even if they are obviously wrong. The instinct for loss aversion also kicks in, making us fear change.
What makes mental models so important is that they don't just exist in our heads. They lead to actions that eventually ingrained into our organizational DNA..
Turning Assumptions Into Business Practice
Humans are wired to compete and businesses even more so. To win consistently, we have to continually get better at what we do by honing our capabilities and seeking advantage wherever we can. So we work hard to improve processes and practices, make smart investments and devise clever strategies.
For over a century, General Electric has been a paragon of corporate America. It pioneered Six Sigma to improve quality and reduce variability in the 90s. More recently, it brought in Lean Startup guru Eric Ries to help instill a more entrepreneurial culture and speed development time to market. The initiative caught on and eventually became the FastWorks program.
One of the most touted FastWorks projects was the development of a gas turbine to replace its 9E platform, one of its most popular engines. It was a huge success, reducing time to market by a full year while significantly increasing performance. At the same time, it acquired the power division of Alstom, which TheStreet.com called its best deal of the century.
All of this fit nicely with GE's strategic mindset. Power generation was already a traditional strength of the company, a major source of revenues and profitability. By improving its development process and increasing its footprint, it greatly improved its competitiveness in the industry and was, seemingly, poised to soar to new heights.
Unfortunately, things didn't work out that way. The rise of renewable energy reduced demand for gas turbines and the company was soon laying off employees by the thousands. GE had become a square-peg business in a round-hole world. Profitability plunged. Its CEO, Jeffrey Immelt, was pushed out. The whole thing was, to put it mildly, a fiasco.
The Efficiency Paradox
Most leaders are driven by efficiency. By honing operations and cutting costs, you can increase margins and invest the proceeds into lower prices or better quality and improve your competitiveness. Yet the efficiency mindset can lead to a paradox. Focusing solely on efficiency often results in a reduction in adaptability, which can undermine your productivity.
One example of this is the retail industry, where margins are famously thin. So, perhaps not unreasonably, most companies work hard to reduce labor costs. They pay little, optimize work schedules and don't invest much invest in training. No stone is left unturned to maintain the absolute lowest overhead possible.
Yet in The Good Jobs Strategy MIT's Zeynep Ton found that investing more in well-trained employees can actually lower costs and drive sales. A dedicated and skilled workforce results in less turnover, better customer service and greater efficiency.
For example, when the recession hit in 2008, Mercadona, Spain's leading discount retailer, needed to cut costs. But rather than cutting wages or reducing staff, it asked its employees to contribute ideas. The result was that it managed to reduce prices by 10% and increased its market share from 15% in 2008 to 20% in 2012.
Its competitors maintained the traditional mindset. They reduced cut wages and employee hours, which saved them some money, but customers found poorly maintained stores with few people to help them, which damaged their brand long-term. The cost savings Mercadona's employees identified, on the other hand, in many cases improved service and productivity and these gains persisted long after the crisis was over.
Getting To Root Causes
How we see problems drives what kind of solutions we come up with. GE saw that its power business drove profitability, so it invested its energies to improve margins for its gas turbines. When Mercadona's competitors saw economic conditions erode their revenues, they moved quickly to cut costs.
Yet clearly, those mindsets drove them to adopt strategies that did more harm then good. A better gas turbine doesn't do much good when customers are switching to renewables. When cutting costs also drives revenues lower, it defeats its own purpose. When you misdiagnose the problem, you are very likely to come up with the wrong solution.
To truly improve operations, you need to get at root causes and you do that by asking "why?" Why do we think that gas turbines are a good business to bet the company's future on? Why do we think cutting labor costs is the best way to improve margins? What would be the counter argument? What other options do we have?
Our brains are wired to look to the past, not the future. We develop mindsets so that we can make decisions quickly, without having to pause to examine every aspect of our lives. That's why it's so important to take time to test our assumptions, expose ourselves to dissenting opinions and push ourselves to see things in a new light.