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A Whole New (Cognitive) World

Last week I gave a keynote speech for 830 financial consultants in New York at an IMCA event.

Last week I gave a keynote speech for 830 financial consultants in New York at an IMCA event. If you don’t have more than $20 million in the bank, then you may not have spent a lot of time with people like this. They were primarily private wealth advisors for the world’s wealthy. What I learned there, through the formal program, the survey I conducted of participants, and the numerous conversations I had afterward, points to a whole new world. Let me summarize:

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1.    2010’s challenge is how to grow now that the cost-cutting has slowed

2.    This is going to require a new way of thinking about the world

The 2010 growth challenge

About 100 participants completed my brief survey prior to my lecture, and the results overwhelmingly echoed what I have been hearing over the past couple of months.  While 2009 was about saving market share and protecting profitability, 2010 will be about designing effective growth strategies. A full 76% of respondents cited either accelerating their growth rate or developing their strategy as their top objective for the year.

Surprisingly, despite the media’s seemingly non-stop attention on regulation, these participants were far more worried about changes in their clients’ needs and behaviors. This was true last year, which we might expect as the credit crisis forced all of us to rethink our financial goals. But it seems 2010 will offer no respite. Close to 50% of respondents said changes in client needs or behaviors was the biggest challenge in both years.

The New View

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After my talk, I stayed around to hear a lecture by Andrew W. Lo from MIT. He is an economist that founded and promotes the concept of an “adaptive market.” I had read a bit about him and his theories, but as I sat in the back of the massive ballroom, behind aisles and aisles of people, I realized that he was talking about something we are starting to see pop up in numerous, seemingly unrelated domains.

Essentially, what he argues is that our old model of the world is broken because it assumes that people and markets act rationally. The Adaptive Markets Hypothesis assumes that people adapt their expectations, that their behaviors are driven by biology, not mathematics; by greed, not a cold assessment of risk and reward. It assumes the agents who drive market dynamics are humans, not machines.

This theory fits very well with what we have been discussing here. The old model of business strategy said that companies act rationally and so the way to win was to do something that others cannot do. But this view conflicts starkly with everything we see. We’ve featured here innumerable “outthinkers,” like Valley Forge Fabrics, Vistaprint, EyeBuyDirect, HSN, and Tradestation, that have disrupted their markets not by doing what others can’t do, but rather simply by doing what others will not do. Indeed, in every case the large incumbent could, if it makes the right sacrifices, kill off the rising star with minimal effort. But the big defender chooses not to defend itself.

In other words, the sources of advantage, the barriers that protect fast growing companies, are cognitive. They are not the hard, sustainable advantages we read about in business school.

George Lakoff, someone I hope to feature here sometime, has built an impressive mass of research that shows that people’s behaviors are driven primarily by unconscious forces. Indeed 94% of human behavior may be unconscious. You might read The Political Mind or Don’t Think of an Elephant to get a taste for the tangible implications of this in politics.

Another thinker who I will be featuring soon is Peter Paret, author of The Cognitive Challenge of War, who shows that the reasons Napoleon seemed to be utterly unstoppable during the war of 1812 was that the Prussians found themselves bound in a web of cognitive challenges. These social and psychological barriers prevented the Prussians from adapting effectively to a new form of competition.

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And we have Raj Sisodia, David Wolfe and Jag Sheth, authors of Firms of Endearment, and their fellow social-capitalists who are helping establish that there is a meaningful link between appealing to people’s hearts and financial performance.

What all of these gurus are telling us is that in almost every domain of competition, we are entering a new understanding. Our old model, which held that people act like machines and so masses of people – markets, organizations, societies – must also act like machines and we need only uncover their natural laws, is wrong. Cognitive and biological forces make this a more perplexing, yet more exciting, world.

If you have not fully thought through how you are going to trigger new growth this year, invest the time to look at it with fresh eyes now, because your competitors may be doing just that now.

Ask yourself the questions below to see how you can outthink your competition by implementing innovative strategies.

1.    Where do I see potential need or growth?

2.    Are my competitors preparing for this need or growth?

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3.    Are there companies in other industries that are using particular strategies that might be effective in my niche?

4.    If I assume that my customers are not behaving logically, then how can I come up with a seemingly illogical approach to reach them?

5.    How can my company do something good for all stakeholders while creating a stronger brand?

6.    How can I publicize our ethonomic mantra so that all stakeholders are on board and identify with our company because of its ethonomic mission?

About the author

Author of Outthink the Competition business strategy keynote speaker and CEO of Outthinker, a strategic innovation firm, Kaihan Krippendorff teaches executives, managers and business owners how to seize opportunities others ignore, unlock innovation, and build strategic thinking skills. Companies such as Microsoft, Citigroup, and Johnson & Johnson have successfully implemented Kaihan’s approach because their executive leadership sees the value of his innovative technique.

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