What Happens When You Make Assumptions?
Issue 106, May 4, 2023
Does your organization have what it takes to succeed? For example, how many times a day do you make an assumption? On a scale of magnitude, perhaps it’s the assumption that the sun will rise each morning and gravity will still be in place at night — to assuming that other people will drive responsibly and the trash in your neighborhood will be picked up. Assumptions are based on trust that something or someone external to yourself will perform as expected. In fact, enlightened societies are built on a series of layered assumptions that keep them operational.
Yes, but. How many assumptions do you make that are wrong? Let’s face it, we tend to get comfortable and lazy, so we prefer to maintain the status quo. We resist change, are comfortably cocooned in “the way things are,” and will go to the mat to ensure our sense of security. At 2040, we champion critical thinking as the most essential skill to run an organization. Critical thinking is a reality check, and it can make you and your team uncomfortable and anxious when it questions your carefully laid plans and organizational structure. But critical thinking is the core unlock to anticipate the future and plan for the long term instead of the potential shortfalls of short-term thinking.
Assumptions Off the Rails
Let’s look at a cautionary tale. An aggressive private equity firm invested in a company in a high-growth industry. The investors took majority roles on the board and a team of equity operators were put in place, ensuring they could call the shots for the beleaguered CEO who was given a mandate for 25% growth in year-one. The aspiration for this expansive revenue was based on the CEO’s presentation about developing a series of new products and services to a segment of the market that the company had yet developed. The major goal of course was to deliver short-term returns at the lowest possible investment.
In seeking equity funding, the company had oversold its capability and capacity, but they were really convincing. Their balance sheet demonstrated solid growth and the brand was well known in the market. The equity firm believed they were making a solid decision with a high percentage of potential gain.
The CEO is a charismatic leader who has perfected the ultimate, persuasive sales pitch. He knew the direction he wanted to take the organization couldn’t be realized without equity investment. As we often write, this is another case where a visionary plan was only in the CEO’s head, now in the equity firm’s head. But the vision and the plan weren’t known or even understood across the company’s leadership and workforce.
The massive assumptions here were that the investors believed the organization had the resources, talent, and stamina to dig in and innovate the new revenue streams. Plus, the CEO was overconfident that the organization would rise to the occasion and could actually achieve what was conceptualized in her mind. The assumptions clearly did not recognize the capabilities and capacities of the organization.
Plans are often laid out, with much energy, hope and promise without the reality check of critical thinking to determine what is really possible and realistic. We have stressed the importance of operational readiness and how to understand the context that bridges what is desired and what is possible. Indeed, pushing out the boundaries can lead to growth personally, professionally and for an organization. But drastic, over-aspiration in too short a timeline, 9 times out of 10, results in failure.
Another massive assumption in our scenario was drawing a conclusion without any facts. The whole premise was creating a revenue stream based on customers that didn’t exist, let alone with current customers who didn’t want these new products.
So, even when the goals may make sense intuitively and the organization believes it is capable and has the capacity to pivot or enter a market with new products, results are limited or just completely fail without the recognition of evidence-based identification of the customer need. Also, it’s critical to align the organization with a grounded market orientation, shared purpose, and a capable operational system. Without these, the aspirations and intent cannot be realized.
And here’s a real-life example. Recently BuzzFeed News announced it will shut down. According to Axios, the company’s CEO said in a memo to staff that the business model of news tailored for social media had become too difficult to sustain and the company would focus its efforts on the profitable Huffington Post going forward. It’s a perfect example of a formerly viable (and popular) business becoming victim to the whims of investors who believe they know better (or are simply hungry for profit based on any gamble and promise if a company is willing). And this is happening every day in large and small organizations. It’s one thing to fail and fail fast and a completely another to try to transform a business model without the infrastructure required to establish and sustain it.
The Fatal Tech Assumption
We are witnessing the implosion of many tech companies that have made fatal assumptions. The percentage of startups that fail in the first year is 90%. Why? Many entrepreneurs have devoted their careers to creating a product or service that no one wants. They misjudge the market, assume flocks will run to use one product or another, without recognizing that use may be to a small niche audience or society as a whole simply doesn’t see the value nor may feel ready. Think of the impressive $13.7 billion loss Mark Zuckerberg triggered in his pursuit of the metaverse, a product that is now experiencing significant declines in its user base as the clouds of hype part and users question the applicability.
It’s a simple matrix: to be successful, create a product that consumers want and can be made and sold profitably. Add to that, any organization needs to focus on new products that their workforce can deliver. That is not to say that you need to be self-limited based on your accessible skillsets. It does mean that if the new direction is properly vetted and the workforce is retrained and reskilled, forge ahead.
The Expensive Wake of False Assumptions
As we have written in The Truth About Transformation, hindsight is 20/20, but we say it’s really a revelation of assumption blindsight. Any assumption that is presumed to be true without concrete evidence to support it is doomed for failure. That said, in a time of uncertainty and market disruption, assumptions enable organizations to plan and make decisions. The caveat is that business assumptions must be based on data, research, and experiences. And the first step is to practice critical thinking to validate the risk/reward of the venture at hand. That exercise will reveal any assumptions that management has made believing it understands its customers and its workforce.
The Ladders has identified a list of companies that went out of business based on remarkably bad assumptions and business decisions. Here are a few of them as examples of how the intelligent use of data might have produced entirely different outcomes
While A&W never technically filed for bankruptcy, there are far fewer of them these days. The fast-food chain suffered a major loss in the 1980s because it ran a special promotion that consumers simply didn’t understand. A&W created a third-pound burger to compete with McDonald’s popular quarter-pounder and offered it at the same price. But the burger didn’t sell, a fact that was absolutely flummoxing to the company.
“A focus group confirmed: Americans have no common sense. Because the number three is smaller than the number four, consumers thought they were getting a smaller burger when, in fact, the meal at A&W had more meat.”
We’re not so convinced this can be blamed on the American public. Any basic customer research would have revealed the potential problem. This is also an example of management hubris. One of our 2040 mantras is about the negative effects of inherent bias; just because you think an idea is great does not mean your customers – or even your workforce – would agree.
A subscription-based ticketing service for movies, MoviePass launched in 2011 and was developed into an app shortly thereafter. For a monthly fee, MoviePass allowed each subscriber to redeem three movie tickets and over time, new plan structures evolved with more benefits for the user. What happened was the unlimited options gave way to financial loss, as users went to more and more movies on MoviePass. Competitors were updating their rewards programs at record speed, also pricing out some of the lucrative options for users. In 2018, long before the pandemic threw movie attendance into disarray, MoviePass ran a deficit of millions and never recovered and went out of business in 2020.
This use case is a goldmine for proving that data can provide customer insights to prevent a business model derailment. Analyzing expected customer behavior matched to financial results would seem obvious. Couple that with a comprehensive business model based on sound assumptions and MoviePass could have become the popular AMC Rewards ticket subscription service, not be eclipsed by it.
In 2003, Red Lobster ran an extravagant promotion that eventually landed them in bankruptcy. That year, they enticed customers to come in and enjoy an all-you-can-eat snow crab experience for the low cost of $20. The problem? Snow crab is expensive and highly regulated by the government. While snow crab was under $5 per pound at the time, the restaurant underestimated consumers’ appetites. Diners came in and ate and ate and ate. In fact, they ate so much that the promotion cost Red Lobster over $1.1 million per month.
This example of not using data and analytics to field test a new product is in retrospect a giant “what were you thinking?” The power of market research is its ability to flag a misjudgment or faulty assumption. That would have solved the disastrous loss leading promotion. But more fundamentally, running financial models to test a new product seems pretty basic.
Business books will be written about JC Penney and its fall from retail grace. It has had a revolving door of CEOs, rebranded and updated its stores, and even filed for bankruptcy. When whiz kid retailer Ron Johnson came from Apple to JC Penney, he brought with him a vision for a new retail model. He redesigned the stores into marketplaces, which could have worked. But he also got rid of the familiar pricing promotions to create an everyday fair-priced merchandise model. Because JCP stopped putting discount pricing on everything, customers thought they were no longer getting a deal. Sales came to a screeching halt, as did Mr. Johnson.
Johnson’s strategy neglected several key factors: market testing with customers and bringing management into his innovative thinking. Instead, he made assumptions about loyal customers and the workforce’s ability to pivot without being included in the decision-making process. This is another example of hubris and leadership with blinders believing they have the best ideas, the most progressive solutions, and a monopoly on innovation.
Next week we will identify tactics and strategies to avoid the failures discussed above. Stay tuned!
Get “The Truth about Transformation”
The 2040 construct to change and transformation. What’s the biggest reason organizations fail? They don’t honor, respect, and acknowledge the human factor. We have compiled a playbook for organizations of all sizes to consider all the elements that comprise change and we have included some provocative case studies that illustrate how transformation can quickly derail.