COURSE CODE: STRATMGMT within new markets.

One way to reach a

new market is to enter a new retail
COURSE TITLE: Strategic Management channel or geographic areas. One
example, Kickinghorse coffee, BC
DISCLAIMER: Students are still advised to based, blends premium coffee, fair trade,
check on the other materials provided by their and organic to create a solid business
professors. This reviewer is based on the model.
materials posted in Canvas. 3. Product development involves creating
new products to serve existing markets.
8.1 Concentration Strategy(s) • Originally from Vancouver BC, Jones
• A strategic approach in which a business Soda Co. takes a novel approach to
focuses on a product development. Each year, the
single market or product, (compared with firm introduces holiday-themed set of
International unusual flavors.
or Diversification strategies) • For Halloween 2013, Terror of Night
• Company focuses investments & resources, & Orange, Night of Red Licorice and
marketing within that one market Dawn of Caramel Apple flavours were
• But greater risk of loss if demand falls or offered
competition • None of these holiday flavors are
increases expected to be big hits, of course. The
hope is that the buzz that surrounds the
3 Sub-strategies of Concentration Strategy unusual flavors each year will grab
1. Market penetration seeking additional customers’ attention and get them to try
share of existing markets using existing —and become hooked on—Jones
products. Soda’s more traditional flavors.
• Often relies on advertising to attract
new customers within existing markets Horizontal Integration:
• One famous example is the (ongoing!) Acquisition & Mergers Rather than rely on their
cola wars between Pepsi and Coke. own efforts, some firms try to expand their
2. Market development involves taking presence in an industry by acquiring or merging
existing products and trying to sell them with one of their rivals - Horizontal integration
2 types of horizontal integration: • Fewer than one in six increases shareholder
• Acquisition: one company purchases another wealth
company. The acquired company is typically • 30-45% are reversed (at huge losses)
smaller than the purchasing firm • Harder to merge cultures, processes and people
• Merger: Joining of two companies into one. than you think!
Usually involves similarly sized companies.
Track record of mergers is poor, probably based Key Takeaways
on the difficulty of integrating 2 cultures. • A concentration strategy involves trying to
compete successfully within a single industry.
Horizontal Integration • 3 sub-strategies - Market penetration, market
Horizontal integration can be attractive for development, and product development.
several reasons: • Mergers and acquisitions are popular moves
• Achieving greater economies of scale, includes for executing a concentration strategy, but
research, product development and testing, executives need to be cautious about horizontal
distribution infrastructure, sales force,etc. integration because the results are often poor.
• Provide access to additional markets
(especially smaller ones where 2 companies 8.2 Vertical Integration Strategies
cannot effectively compete) Vertical integration:
• Added marketing channels When a firm gets involved in new portions of
• Reduced competition the value chain, also called upstream or
• Greater market share – especially if ‘new’ downstream acquisition
market share places combined company near the • Can be very attractive when a firm’s suppliers
‘top’. or buyers have too much power over the firm &
are becoming increasingly profitable at the
Horizontal Integration firm’s expense
Despite the potential benefits of mergers and • By acquiring supplier or buyer, executives can
acquisitions, their financial results often are very reduce or eliminate leverage, and capture
disappointing associated profits
• More than 60 percent of mergers and • Serious risks, upstream/downstream business
acquisitions erode shareholder wealth generally require very different business skills...
• Can create complacency, no competition!
 others expand into new industries without the
Vertical Integration Strategies involvement of another firm.
• Backward - firm enters a supplier’s business
• World of Limited supplies Three Tests for Diversification
• Used when executives are concerned that a Three (3) key tests for diversification:
suppliers have too much power over their firms. • How attractive (i.e. profitable) is the ‘new’
• Forward - firm enters buyer’s business. firm / industry under consideration?
• Useful for neutralizing the effect of powerful • How much will it cost to purchase a firm /
buyers. enter this industry (cash, time, effort...)? Do hard
financials make sense? - ROI, payback period,
Risks - Skills break-even etc.
Risks - Quality • Will either the new firm or purchased firm be
better off? Unless at least one side gains or
Forward Vertical integration improves their competitive advantage... Why
Author bother?
• If fails to pass – REJECT
Key Takeaways DIVERSIFICATION!
• Vertical integration occurs when a firm gets
involved in new portions of the value chain Related Diversification
• Backwards vertical or upstream integration is • Related diversification: When a firm moves
entering the domain of a supplier into a new industry that has important
• Forward vertical, or downstream integration is similarities with the firm’s existing industry or
moving closer to retailers and end-consumers industries
• Both seek to reduce or eliminate leverage that • Core competency: A skill set that is difficult
the supplier or buyer has over the firm for competitors to imitate, can be leveraged in
different businesses, and contributes to the
8.3 Diversification benefits enjoyed by customers within each
Diversification strategies: business
Involve a firm entering entirely new industries,
and new value chains Many firms accomplish Strategy in Action!
this through a merger or an acquisition, while
How are Lauder (textbook) various product lines 8.4 Strategies for Getting Smaller
related? • Retrenchment: Reducing the size of part of
• Prescriptions, ‘wholesale’ perfume, Smashbox one or more of a firm’s operations, often through
cosmetics, sensuous perfumes, Bumble & laying off employees.
Bumble hair care products, Clinique cosmetic, • Firms using this strategy hope to make just a
Bobbi Brown makeup, MAC retail stores, Aveda small retreat rather than losing a battle for
Spa products & Joe Malen perfume, survival.
What core competencies are similar / required?
Spin-offs
Unrelated Diversification • Spin offs occur when business create a new
• Occurs when a firm enters an industry that firm from a piece of their operations
lacks any important similarities with firm’s • Reduces management layers and can lowers
existing business line costs
• Diversification, when done properly, may • Enables spin-off to focus on their core
reduce over-firm risk. competencies
• All too often hard to see the link between • Increased clarity and value to investors
existing business lines and proposed acquisition. Examples
• Executive ego and salary may play a role • Freescale Semiconductors (Motorola)
• Higher risk... • Toyota cars (Toyota Loom Works)
• Delphi Automotive parts company (GM)
• Guidant Corp - health devices (Eli Lilly)
Key Takeaways • AOL and Time Warner reverse the merger
• Diversification strategies involve firm stepping
beyond its existing industries & entering new Liquidation
value chain • If selling off part of business not possible, best
• Related diversification (entering a new option may be liquidation
industry that has important similarities with a • Involves simply shutting down portions of
firm’s existing industries) is wiser than unrelated firm’s operations, often at a tremendous
diversification (entering a new industry that financial loss.
lacks such similarities). GM - Geo, Saturn, Oldsmobile, and Pontiac
brands.
Ford followed - by shutting down its Mercury • For example, GE competes in a wide variety of
brand. industries, including: financial services,
• Painful because massive investments are insurance, television, theme parks,
written off, but may save a company from total electricity generation, light-bulbs, robotics,
ruin. medical equipment, railroad locomotives, and
aircraft jet engines.
Summary - Strategies for Getting Smaller • GE executives must decide which business
Executives sometimes need to reduce the size of lines to grow, which ones to shrink, and which
firms in order to increase chances of survival. ones to abandon.
Includes reversing poor investment / mergers /
take-overs decisions Limits of Portfolio Planning
Options include: Limitations to portfolio planning:
• Retrenchment: Reducing the size of a part of • Oversimplifies the reality of competition by
a firm’s operations, often through laying off focusing on just two dimensions when analyzing
employees. a company’s operations within an industry.
• Diversification (Spin-off) – Creating new • Can create motivational problems among
separate firms from part of existing business employees.
• Liquidation: Shutting down portions of a • Does not help identify new opportunities.
firm’s operations, often at a tremendous
financial loss. Key Takeaways
Portfolio planning is a useful tool for analyzing
8.5 Portfolio Planning and Corporate Level a firm’s operations, but this tool has limitations.
Strategy The BCG matrix is one of the most widely used
Portfolio planning: A process that helps approaches to portfolio planning.
executives make decisions involving their firms’
with various industries. In Conclusion
• Offers suggestions about what to do within • This chapter introduced students to
each industry, and provides ideas for how to corporate-level strategy. Executives grappling
allocate resources across industries. with strategy must decide in what industry(s)
their firms will compete.
• Concentration strategies involve competing • Board often includes members with special
within existing firms to expand profits. skills sets (Lawyer, Accountant) to assist Board
• Integration, backwards or forwards, involves in managing
expanding into new stages of the value chain. • Major Owners sit or appoint repres
• Diversification involves entering entirely new entatives on Board
industries. • Institutional investors, that have invested large
• Sometimes circumstances require shrinking the sums of money may also have representation on
firm through retrenchment or restructuring. Board
• Finally, portfolio planning is a useful tool for
analyzing firms that participate in a wide variety -Board insiders: Members of the Board of
of industries. Directors that employed inside of the
organization
• CEO is usually member, often non-voting
• Few others… (to avoid inherent conflict of
Module 10.1: Leading an Ethical interest)
Organization: Corporate Governance, The Board
Corporate Ethics, and Social Responsibility • Under Canadian & Provincial laws, Boards
have certain legal responsibilities
Corporate governance- processes, policies, & • Taxation (CRA)
laws that govern an organization, establishing • Employment Laws
accountability & reducing conflicts of interest • Hold AGMs
associated with principle-agent issues • Represent stakeholders
• Act in best interests of the Corporation
Board of directors: group of individuals, either
elected or appointed, that oversees the activities Boards will typically:
of an organization or corporation • Hire (& fire) the CEO, set overall org structure
- Board outsiders: Most members of the • Approve annual Budget, & hire auditors
board of directors are employed outside • Contribute to setting overall strategic direction
of the organization • Approve high level policies & procedures
• Most Boards have 1 (one) Employee – the
CEO
• CEO duality: Occurs when the CEO also • Perks
chairman of the board, known to create bitter • Corp. must pay competitive wages for scarce
divide within corp talent required to manage $B corp, competitive
environment…
Agency problem: Exists when interests of • Boards face increasing scrutiny from investors
individuals that act as agents to manage / AGMs when CEO pay out of line with industry
company, do not align with interest of the firm’s norms, & when bonuses paid when losing
stockholders money / performing poorly
- The composition of the board is critical • CEO salary is not well correlated with firm
because the dynamics of the board play success, but highly correlated with firm size...
an important part in resolving the
agency problem CEO Perks
• Range from free ice-cream to life-time use of
Principal–agent problem - problem of devising corporate jet
compensation system that induce an agent to act • Can be effective CEO retention strategy, but
in the best interests of a principal potential for negative press when perceived by
• owners (stockholders) are the principals and (buying) public as excess
the executive managers of the firm are their • In publically trade & public companies, CEO
agents pay generally public information…
• Historically owners worked in their firms and
balanced short and long term needs Poor Corp. Governance
• Executive managers who typically work in a • Under-performing firms can be tempting target
job/firm for ~ 5 or 6 years, have a much shorter for takeover
focus
• Creates a conflict Takeaways:
• Firms benefit from strong corporate
CEO Pay governance including an active board that
• Board of Dir sets CEO pay, generally includes: monitors CEO actions, provides strategic advice,
• Guaranteed salary and helps to network to other useful resources
• Cash bonus • When such mechanisms are absent, CEO
• Stock options excess may go unchecked, resulting in negative
publicity, poor firm performance, and even occurs when morality is more than simply
potential takeover by other firms following social rules or norms
• Stage 5 considers different values and
Module 10.2: Stages of Moral Development opinions.
• Thus, laws are viewed as social contracts that
Psychologist Lawrence Kohlberg suggested 6 promote the greatest good for the greatest
distinct stages of moral development grouped number of people
into 3 levels: • In stage 6, moral reasoning is based on
Pre-conventional universal ethical principles.
• Stage 1 - individuals focus on the direct • For example, the golden rule illustrates one
consequences that their actions will have—for such ethical principle. At this stage, laws are
example, worry about punishment or getting grounded in the idea of right and wrong. Thus
caught individuals follow laws because they are just and
• Stage 2 - right or wrong is defined by the not because they will be punished if caught or
reward stage, where a “what’s in it for me” shunned by society.
mentality is seen • Consequently, with this stage there is an idea
of civil disobedience that individuals have a duty
Conventional level to disobey unjust laws.
• moral reasoning - morality is judged by
comparing individuals’ actions with the Corporate Scandals
expectations of society. • In 90s and early 2000s, a number of corporate
• In stage 3, individuals are conformity driven scandals in Canada & USA revealed a lack of
and act with the goal of fulfilling social roles. board vigilance
Parents that encourage their children to be good • In Canada, Nortal was the worse, and arguably
boys and girls use this form of moral guidance. the most famous involves Enron who used
• In stage 4, the importance of obeying laws, accounting loopholes to hide billions of dollars
social conventions, or other forms of authority to in failed deals. Before their scandal was
aid in maintaining a functional society is discovered, top management cashed out millions
encouraged of stocks, but many ended up in prison…
• In response to these scandals at Canada passed
Post-conventional level, or principled level X and USA passed Sarbanes-Oxley Act to
tighten the financial standards for the boards of • Many changes introduced in Canada Securities
public and accounting firms Act & Not-for-Profit Corporations Act and
Corporate Ethics & Social Responsibility – (Omnibus) Bill 198
USA
• Sarbanes-Oxley Act of 2002: set new or Fair Trade
increased standards for boards of public USA • Defined as when all members of the supply
companies and accounting firms chain (from growers on…) are paid a fair, living
• response corp. scandals at Enron, WorldCom,& wage
Tyco • Often requires only a small increase in final
• 11 aspects represented some of the most price
far-reaching reforms in 70 years • Fair Trade acts as to confirm accuracy of claim
• 2010 the USA enacted the Dodd-Frank Wall • Good public awareness of certification,
Street Reform and Consumer Protection Act marketing
• Significant increase govt control of financial • One example of Social Ethics
markets
Corporate Ethics & Social Responsibility – Corporate Social Performance (CSP)
Canada • Social entrepreneurship: Entrepreneurial
• In 2002, Canadian securities regulators actions where both economic and social value
pressured to adopt similar reforms as USA to creation occur
maintain investor confidence in the Canadian • Corporate social performance (CSP): The
regulatory system & protect integrity of degree to which a firm's actions honor ethical
Canadian capital markets values that respect individuals, communities,
• However, lower sense of urgency in Canada and the natural environment
since, at the time, Canada had yet to experience • Kinder, Lydenberg and Domini & Co. (KLD),
corporate fraud on the same scale as in the a Boston-based firm that rates firms on a number
United States. of stakeholder-related issues with the goal of
• Canadian regulators did seize opportunity (of measuring CSP
Sarbanes-Oxley) to introduce desired & • Also impacts firm’s ‘Social license to Operate’
long-delayed corporate and securities law reform
in 2003
Corporate SP – Metrics • Corporate scandals, and Canada / USA
• Assessing the community dimension of CSP legislative responses
is accomplished by assessing community • Corporate Social Performance, and objective
strengths such as charitable or innovative giving measures of both positive and negative actions
that supports housing, education, or relations related to CSP
with indigenous peoples, as well as charitable
efforts worldwide such as volunteer efforts or
in-kind giving. Generations in the Workplace
• CSP diversity strengths are scored positively • Traditionalists - born between 1925 and 1946,
when the company is known for promoting fought in World War II and through The Great
women and minorities, especially for board Depression. This generation is now mostly
membership and the CEO position. Employment retired
of the disabled and the presence of family • Baby boomers - born between 1946 and 1964,
benefits such as child or elder care would also corresponding with a ‘boom’ of population
result in a positive score by KLD. following the end of World War II
• The employee relations dimension of CSP • Generation X - born between 1965 & 1980;
gauges potential strengths such as notable union Gen X symbolizes the unknown nature of this
relations, profit-sharing and employee generation
stock-option plans, favorable retirement • Generation Y - born after 1981, this group is
benefits, and positive health and safety programs also known as Millenials as well as “The Trophy
• The environmental dimension records Generation” is now entering the workplace
strengths by examining engagement in
recycling, pollution prevention, or the use of
alternative energies. KLD would also score a
firm positively if profits derived from Generational Influences on Work Behavior
environmental products or services were a part
of the company’s business.

Takeaways:
• The 6 stages of moral development
Generational Y Purchasing Power
• Parents play a major role in shaping children’s
attitudes about debt, saving & spending. But
15-25 yr have a sizeable impact on parents’
spending, particularly technology (InSites
Consulting)
• 51% say they influence the technology parents’
adopt
• 41% influence parents’ purchase of products &
services
• 31% influence parents’ decisions on where to
shop
• So what appeals to the Gen Y market? Survey
respondents listed the five most important
characteristics for a brand or product as:
1. Up to date Module 10.3: Decision Making and Bias
2. Own style Sound Familiar?
3. Real/authentic Rational Choice Model
4. Uniqueness
SOLVE
5. Clean reputation
•S - State the problem in precise language
• Coolness & trendiness ranked much
farther down list,Gen Y looking for substance •O - Outline your usual response

over form, & originality not cookie-cutter •L - List your alternatives and their
consequences
•V - Vitalize the concept by a) selecting best
alternative, b) formulate plan of action, & c)
implement plan
•E - Evaluate the success of your choice

Takeaways:
Generational differences provide powerful
influences on the mind-set of employees that
should be carefully considered to effectively
manage a diverse workforce.
Rational Choice Model Limitations Rational Decision-Making

Only problem with this model is that most In reality, decision making is not rational
people indicate that it is rarely the way they because there are limits on our ability to
make decisions… collect and process information.
Several concern when applying model within Because of these limitations, Nobel
org complex Prize-winner Herbert Simon argued that we
can learn more by examining scenarios
•Rational decision-making assumes that options where individuals deviate from the ideal.
are clear and that a single best solution exists
These decision biases provide clues to why
•Many strategic decisions are not presented in individuals such as CEOs make decisions
obvious ways that in retrospect often seem very illogical—
especially when they lead to actions that
•Also assumes no time or cost constraints damage the firm and its performance.
•And, that accurate information is available
How about this one?

Knowledge-based Decision Making

•Identify the Mega Question
•Background Materials
•Informing the Issue
•Identifying the Choices
•Analyzing the Choices
•Determining Areas of Con census
•Identify Action, Intent and Accountability
(Handout)
Making Choices: Rational vs Organizational
Reality
Decision-Making Styles
 1 - Anchoring and Adjustment Bias

Pick a card – any card

Intuition!

A ball and a bat together cost $1.10. The

bat cost a dollar more than the ball. How
much does the ball cost?
Over 50% of Harvard and M.I.T. students Did I remove your Card?
got this wrong. Why? They did not bother to
check. They relied on their intuition that
happened to deceive them.

Anchoring & Adjustments

When individuals react to arbitrary or

irrelevant numbers when setting financial or
other numerical targets.
Might be tempting to compare your
post-grad starting salary with wages earned
pre-grad, or compare to siblings, friends,
parents, & others with different majors
Instead, research average starting salary for Adjusting….
graduates with your background,
experience, & other relevant characteristics
While anchoring has some effect, people often
This bias can undermine firm performance try to adjust for anchors they know are wrong by
when executives make decisions about adjusting
potential ROI by comparing to previous
deals rather than based on a realistic & But, they will only adjust until the point where
careful study of potential choices they no longer sense that they have to adjust
Which suggests that they will adjust until
Example. reaching the edge of the unknown quantity or
area of unknown

Overcome, by going a little further than you

think is necessary!
2 - Availability Bias
What keeps you up at Night?
(Terrorist Attack or Driving?)

•A Roulette wheel, marked 0 to 100

•But, only stops on 65 or 10!
•Question - Is the % of African nations among
UN members larger or small than the number
you just ‘spun’?
•Same effect (without wheel) if you ask whether
Ghandi was older than 114 when he died? How
old was he?
•Interestingly, answers are higher than if you ask
whether he was older than 35 when he died?
How old was he?
Why?
Availability Bias Assuming you’re a Couple... What % of the
cleaning do you do?

The availability bias occurs when more readily

available information is incorrectly assessed to
also be more likely Bet if I asked both of you, it adds to more than
100%. Why? Easier to Remember what I did!
•Do you think that the odds of dying in a auto
accident are high or lower than dying from
stomach cancer?
•Perhaps your are influenced by media coverage,
which tends to report accidents, but not deaths
by stomach cancer, which kills more than 100x
more people!
•This bias affects companies which focus on
readily available information such as their own
performance figures, while failing to collect
meaningful data on their competitors or industry
trends

Availability & Risk

Availability Bias
Great days to be selling insurance…

•Directly affected by the number of

examples we can quickly come up with, & Assessing risk, Which is higher danger?
•Especially ease at which we come up with 2x Stroke vs accidental death
them!
20x Tornadoes vs asthma
•Interestingly, once we push harder (i.e. to
come up with more examples), it quickly 52x Death by lightning vs botulism
becomes harder! Let’s try!
18x Accidental death vs Death by disease
•Think of the last few times you rode your
bike? 4x Death by accident vrs dying from
diabetes
•Now, try to identify the last 12 times you
rode your bike?
•First few were (probably) easy! But then
harder…
•Odd result, people who do come up with
12 (rather than a few) are less confident…
3 - Escalation of Commitment Bias
4 - Fundamental Attribution Error
Escalation of Commitment
•Fundamental attribution error occurs when
good outcomes are attributed to personal
The idea of “throwing good money after characteristics but undesirable outcomes are
bad” illustrates the bias of escalation of attributed to external circumstances.
commitment – when individuals continue on
a failing course of action even after it •Teachers often note when student does well on
becomes clear that this may be a poor path test, it’s attributed to intelligence & hard work!
to follow. Sunk costs are Sunk!! But when student performs poorly, test was
hard!
Regularly seen at Casinos when individuals,
on a losing streak, think the next spin is In a similar vein, some CEOs quick to take
increasingly likely to win credit when firm performs well, but often
attribute poor performance to external factors
such as the state of the economy

Halo Effect

•Hitler loved dogs and little children…

Principal / Agent Problem •Halo effect, inclines us to match our view of all
the qualities of a person to our judgment of one
attribute that is particularly significant
•You work for owners /shareholders
•Story of Facebook or Google
•You are managing a big project that appears to
“I knew the market was going to crash in 2008
be heading for disaster…
•No one knows yet & you may be able to
‘double up’ and still win! (i.e. invest even more
$$ in a dubious project)
Do you do it?
 •Concrete rather than abstract
5 - Hindsight Bias •Assign a larger role to talent, stupidity and
intentions than blind luck
•Focus on a few striking events that did happen
rather than on countless other events that failed
•Tendency to overestimate our ability to have to happen
predicted an outcome that could not possibly
have been predicted
Where were you when your first heard about
•Bias also occurs when mistakes seem obvious
after they have already occurred - “Monday 911?
morning quarterback”
•When gearing up to go camping, a father says ● Flashbulb memories
that he just knows someone is going to forget •The day after the Space Shuttle Columbia blew
something. It turns out that his son forgot his up, Prof asked 1st year students to write down
fishing rod. "I was sure it would happen," says where they were when they first heard the news
the father.
•Three friends decide to bet on a horse race. One •Kept the pages (in student’s own hand writing)
of them breaks from the other 2 & chooses a
horse with very low winning odds, saying that •Asked students again, 5 years later
he has a good feeling about that horse. The long
shot ends up winning, prompting him to claim •Interestingly, many students had changed their
he’d been certain of outcome. location, and when presented with the evidence,
in their own handwriting, even denied it was
their handwriting!
Kodak False Memories…

The decline of photography firms such as Ko

Base-Rate Neglect
dak resulting from increasing popularity of
digital cameras may seem obvious in retrospect (Or, When You Hear Hoofbeats, Don’t Expect
a Zebra)
But, it is easy to overlook poor quality of early
digital technology & dismiss any notion that
Kodak had good reasons not to view this new
technology as a significant threat to film, when
digital cameras were first introduced Mark is a thin man from Germany with glasses
who likes to listen to Mozart. Which is more
likely?
The Black Swan
A) Mark is a truck driver?

•Flawed stores of our past that shape our world B) He is a professor of literature in Frankfurt?
views •How many truck drivers are there in Germany?
•We continuously try and make sense of the •How many Literary Profs are there in
world Frankfurt?

•But the stories we invent to explain Advice – always try to examine the most
common or typical result in considering a course
•Are simple
of action.
 Should I invest in this new company Causal Direction…
(data – only 20% of new companies
survive for 5 years…)
•I collected a bunch of data on male baldness,
Should I run away and join the circus? including age of patient & degree of hair loss
(Data 83% of circus performers rate
themselves ‘very happy’) •Statistically - THERE IS A
CORRELATION!!

6 - Correlation and Causality •But, which direction?

•Is the hair loss making these guys old, or is age
contributing to hair loss?
Correlation & Causality
•
•Lead to problems when individuals make SO, WHAT’S CAUSING WHAT?
inaccurate attributions about the causes of
events.
•Three things are necessary to determine •I collected a bunch of data on the temperature
cause—or why one element affects another in pot & number of kernels that pop per sec.
1.correlation
•Statistically - THERE IS A CORRELATION!!
2.temporal order
3.ruling out other potential causes •But, which direction? Is the heat making the
kernels pop or are the popping kernels heating
• up the pot?

•Also includes tendency to misread randomness SO, WHAT’S CAUSING WHAT?

•They’ve been building a lot of houses near me
over the last 10 years, and I believe that crime is
For example, understanding marketing’s impact increasing too…
on sales involves
1.correlation (do sales increase after more •So, I collected a bunch of crime data, & pop
marketing), density
2.temporal order (does marketing spending •Statistically - THERE IS A
occur before sales increase), and CORRELATION!!
3.ruling out other potential causes (sales
•
increase from better products, more employees,
a recession, a competitor went bankrupt, etc.) But, which direction?
•The first two items can be tracked easily, but Is increasing pop. density leading to more
the 3rd is almost impossible to isolate because crime? or does the increasing crime rate
there are always so many changing factors. attracting more people
•ceteris paribus (all things being equal or
constant) is almost never true
Which is more Probable? based on their own instincts rather than on
careful number crunching

•That there will be a massive flood Dice

somewhere in North America next year, in
which more than 1000 people die
•Roll the dice until you get the same number
OR twice in a roll (3s or 6s…)

•That there will be a major earthquake in BC •Now, what do you think the odds are of the next
sometime next year, causing a flood in roll also being the same number?
which more than 1000 people die
•How about a 4th identical number? [No dice,
• flip a coin]

Let’s try again! I have a standard 6-sided •

dice, with 4 green sides and 2 red sides.
Rolling it 20 times, what sequence is most No matter what you “feel”… what are the real
probable within 20 rolls? odds?
1 - RGRRR
2 - GRGRG Law of Small Numbers…
3 - GRRRR

7 - Sampling Bias •A study of USA kidney cancer in 3,141

counties of USA reveals a remarkable pattern!
•Kidney cancer is lowest in mostly rural,
If women have 1.53 children and men have sparsely populated and located in traditionally
1.38 children, does this mean that women Republican states

have more children than men? •Your thoughts?

•You probably started to think about links &
causes… Maybe discarded Republican, and
focused on rural…
•Misunderstandings about sampling may •But, also turns out that kidney cancer is highest
in mostly rural, sparsely populated and located
occur when individuals draw broad in traditionally Republican states…
conclusions from a small sets of
observations instead of reliable sources of •Turns out extremes (high or low), are easier to
information derived from large, randomly find in small samples…
drawn samples
•Or, asking the wrong people - bias samples My Magic Vase!
(i.e. near Hospitals, ask people about health
issues; survey every shopper from 9-noon, •In this giant vase, I placed 1000 marbles with
M-F) numbers 1 to 1000 printed on them
•Or no sample - Many CEOs have been •So the ‘average’ is 500
known to make major financial decisions
•If you pick 1 marble, what is the odds that you Pilot Training – Yelling is effective. Every time
will pick the average – the one labeled 500? Be
‘near’ 500? I yell at a rookie pilot for a bad landing, the next

•What if you could pick 2 marbles? Have your one is better. Every time I praise a pilot for a
odds of (the average) being nearer 500 good landing, the next one is worse. Ergo,
improved? 3 marbles?
Yelling works & Praise doesn’t!
The Archer
On average, why are tall people’s kids shorter
Might help to think of an archer, sometimes
high, sometimes low… but on average than they are, and short people’s kids taller? [PS
somewhere near the middle… if it wasn’t this way, what would we look like in
a couple of centuries?]
8 – Overconfidence
Why do we tend to notice these abnormalities or
Hot Streaks…
exceptions anyways?
Overconfidence

9 – Representativeness & Framing Bias

Overconfidence bias occurs when individuals
are more confident in their abilities to predict an
Which Sample is More Random?
event than logic suggests is actually possible
For example, two-thirds of lawyers in civil cases
Framing
believe their side will emerge victorious.
But as the famed Yankees player/manager Yogi
Framing bias occurs when the way information
Berra once noted, “It’s hard to make predictions,
is presented alters the decision an individual will
especially about the future.”
make.
Such overconfidence is common in CEOs that
One cause of Poor framing is employees’
have had success in the past and who often rely
reluctant to bring bad news to CEOs
on their own intuition rather than on hard data
To avoid an unpleasant message, they might be
and market research.
tempted to frame information in a more positive
It’s Due…
light than reality, knowing that individuals react
Runs, Streaks, Hot Hands
differently to news that a glass is half empty
versus half full.
Regression to the Mean
WWII Bombs in London BONUS! – Loss Aversion
(http://bombsight.org/#15/51.5050/-0.0900)
Losing vs Gaining
Representativeness
As a species, we are a loss-aversion group!
Representativeness bias occurs when managers Perhaps driven by our evolutionary path where
use stereotypes of similar occurrences when risk = death and risk adverse people survived to
making judgments or decisions. breed, becoming our ancestors by default!!
In some cases, managers may draw from Today, losing $100 of your money is more
previous decisions to ground current decisions painful than if I suddenly gave you $100, about
when, in fact, impact resulted from changes in TWICE as painful…
the environment. So, intrinsically, the fear of loosing something
In other cases, representativeness can lead to has greater motivational force than gaining the
discriminatory behaviors that may be both same thing
unethical and illegal Let’s practice this bias

The Stroop Effect, 1st Read Out loud… Breast Self Examination (BSE)

10 - Satisficing Which statement will be more effective?

A – Research shows that women who do BSE
Satisficing have an increased chance of finding a tumor in
the earlier, more treatable stage of the disease
Occurs when individuals settle for acceptable B – Research shows that women who do not do
alternative instead of seeking best BSE have an decreased chance of finding a
GOOD IS THE ENEMY OF BEST!! tumor in the earlier, more treatable stage of the
While this bias might actually be desirable when disease
others waiting behind you at vending machine, PS do you know that Men get breast cancer too?
research shows CEOs commonly satisfice major Buys, check the data…
decisions such as mergers & takeovers
Which statement will be more effective? Key Takeaways
A – Increasing your home’s insulation will save
you $500/yr
•A wildly successful manager/executives will
B – Not increasing your home’s insulation costs take the time to learn about the numerous
decision biases that exist, and often impede
you $500/yr effective decision making
•And, take steps to overcome them, especially
Summary - Decision Biases for the critical decisions!

In Conclusion

This final chapter has examined

Role of boards of directors in the corporate
governance, including the principal / agency
problem
When boards fail to do their duties, numerous
scandals have ensued, resulting in tighter
Canada & USA legislation
Inter-generational personal differences
Decision making biases, and overcoming them
for improved decision making

GOOD LUCK ON YOUR

FINAL EXAMINATION, AFFILIATES! 😊