The cost of presumptions - international case studies

At their most dangerous presumptions are assumptions that are accepted as a ‘social fact’.  This makes them more dangerous than assumptions.  Assumptions should be explicitly identified and can be tested.  But we remain blind to our own presumptions. 

In this ‘age of disruption’ the cost of presumptions is all around us.  Five years ago, no-one imagined that the taxi industry could be disrupted by new entrants who had neither licenses nor motor vehicles.  The hotel industry never imagined that individuals would allow unknown third parties to rent their houses overnight, or for weeks on end. 

Why?  The presumption was that highly regulated industry structure was a given.  I doubt an incumbent said: let’s test our ‘assumption’ that new entrants cannot enter the market without a taxi license.  Or, let’s test our ‘assumption’ you need to control a fleet of cars to run a taxi business.  This is the nature of social facts: who tests facts? 

But presumptions exist outside of the disruptive technology space.  For example, they exist in the minds of executives operating in developing countries.  Three examples illustrate the nature of presumptions which can damage an organisation’s strategic position. 

In 2006 Shell essentially had to forfeit half of its stake in the massive $22B Sakhalin project and with it its controlling interest.  This reportedly had its roots in the early production sharing agreement that was often described as inherently unfair to Russia, negotiated when Shell had the upper hand.  A decade later the Ministry of Natural Resources suddenly backed environmentalists, revoked permits and delayed work.  Shell faced the threat of a potential US$50B lawsuit.  The balance of power had shifted. 

Shell seemingly presumed that having negotiated the agreement the Russian government would act within that framework.  Was this an assumption that simply proved wrong, or a presumption that was never exposed and tested?  According to a former senior industry executive, had Shell undertaken scenario analysis earlier in the project life they could have navigated these issues much more successfully. 

More recently, Tata set out to build the world’s cheapest car in India in 2008.  The government acquired land to lease to Tata, including from unwilling farmers.  Yet it all went horribly wrong.  Legal challenges by the locals were rejected by the High Court.  This led to civil unrest which ended in violence and riots.  When the plant was within weeks of commissioning Tata finally conceded that the plant would not operate at the original site.  They relocated the near finished plant to another region in India.  Tata clearly presumed that with the force of government on their side, and they would overcome the odds.

Presumptions in both cases turned out to be a very costly. 

Research suggests managers typically confuse fair outcomes – distributive justice – with fair process – procedural justice.  What we know from the study of ‘fair process’ is that people value both distributive and procedural justice.  And in their absence individual demands stretch beyond reasonable to visit punishment and vengeance on those responsible – ‘retributive justice’.  This explains the reaction to the news in Russia: the feeling was that 'Shell had it coming' notwithstanding the obvious 'shakedown' element.    

In a recent MBA strategy class we discussed the approach of Barrick Gold to corporate social responsibility in Tanzania around 2008 (Harvard Business Case).  The vexed nature of these challenges in developing countries is reflected in YouTube video: Peter Munk in his own words (I’m not endorsing the explicit or implied commentary).   The case readings highlight the presumption that the NGO context will remain largely unchanged.  In reality, the NGO world is at least as adaptive and innovative as any corporate.    The Economist argued 15 years ago: “NGO’s now head for crisis zones as fast as journalists do”. 

So what can we do?  Here are three things you could do to lessen the potential risk:

1.       Make explicit 3-5 presumptions that underpin your strategy?  What is it you are assuming that no-one has identified as an assumption?

2.       For each of these presumptions, imagine a scenario which would render the presumption obsolete.  Describe an event sequence which would lead to this scenario. 

3.       What are the implications for your current strategy if this scenario was to unfold?

Remember, scenarios are not intended to predict the future: they are a process for dealing with multiple possible futures.