Imagine you are a major retailer planning to enter an ‘adjacent’ $50B retail market, and you specifically want to attack the market leader for ‘strategic’ reasons. But there’s a catch:
1. The market leader has 15 years accumulated experience in the sector – you have none; and
2. They have nearly 10x the market share of their nearest competitor … (~18% vs. ~2% market share - your likely entry point)
A tough ask. But wait. There’s more.
By dint of your competitor’s history and industry position, they have a lock on most of the good locations for outlets: you will have to settle for less attractive locations. But you want to execute a rapid roll-out growth strategy so you will also pay a premium for these less attractive sites to satisfy your timing needs.
Sir Humphrey (Yes, Minister) would call this a ‘bold decision’. But this was the decision Woolworths' board made when they approved the Masters Home Improvement strategy.
The investment to date is around $3B with accumulated losses of more than $500M, and the prospect it could be 2019 before Masters returns to the black. Exit costs have been estimated at $1.6B.
A decade ago Woolworths rated among Robert Gottliebsen's 'best' (10 Best and 10 Worst Decisions of Australian CEO’s) for Project Refresh. Today, they would make his ‘worst’ category for their investment in Masters Home Improvement.
Woolworths’ decision to compete head to head with Bunnings, Project Oxygen, was designed to ‘suck the oxygen out of Wesfarmers’ distracting them in their effort to turn around their newly acquired Coles group. Ironically the only one that appears to have been distracted has been Woolworths. Coles has outperformed Woolworths on earnings growth for the past 23 quarters. And Woolworths also sold Dick Smith to private equity for the knock-down price of $20M: it re-floated 12 months later and has a $525M current market capital (25 May 2015). One analyst labelled the Masters investment as “the greatest own goal in recent Australian business history”.
What happened? In short, Woolworths made almost every mistake in the book. The investment decision reflects both individual and institutional failures of decision-making: hubris; over-optimism; execution failures; and a continuing risk of escalating commitment (the sunk cost fallacy).
How can you avoid these traps? Here's five simple suggestions.
1. Awareness is not an antidote to this sort of error ridden decision-making. Test your decision-making processes and see how they stack up in terms of protecting your organisation against these common flaws.
2. Take an ‘outside view’ to challenge hubris. Instead of looking at your specific decision, with all your plans, forecasts, estimates and models, ask yourself what the external experience is for similar cases. Have you ever known anyone successfully attack a market dominant player – with a 15 year experience advantage, and a 10-fold market share advantage – from a position of structural cost and location disadvantage?
3. Use ‘premortems’ to challenge optimism. Project yourself into the future and imagine your venture has failed. Why has that happened? What can you do to de-risk your venture. If that’s too hard, add 20-25% to the downside in your pessimistic scenario.
4. Establish exit triggers ahead of entry to avoid escalating commitment (the deep seated bias to make choices that affirm previous choices). What would be a trigger for you to abandon your strategy? Or at the very least, initiate a major review? And subject each incremental investment decision to rigorous investment analysis based solely on incremental value versus incremental capital.
5. If you think the rules of economics don't apply, think again. As McKinsey's say even executives with solid instincts can be 'seduced' by the idea of exceptionalism.
Remember, it's cheaper to learn from other's experience.