The Psychology of Strategy

1

In September of 2010 there was a big event held by a major tech company to announce their latest generation of smartphones. The keynote showed off all the wonderful apps made by their developer community, their superior multitasking ability, advanced mapping technologies, and full-sized touchscreens. The key to this company’s strategy was an integration between hardware, operating systems, and software. They were the world’s largest mobile phone maker, and quite profitable too, thanks to superior supply chain management.

The narrative of the event was exactly right. It showed a deep understanding of what a winning strategy in mobile should look like. There was only one problem: the company running the event was Nokia, and the substance underneath their narrative was exactly wrong.

Within three years, Nokia would sell their mobile phone division to Microsoft for $7 billion—a 97% decline from their peak market cap of $273 billion in the dot-com boom era.

In retrospect it’s easy to see that their OS was nowhere near good enough, that they didn’t realistically have the right team to build one, and that just because they sunk so much effort in it over the years didn’t mean that it was a good reason to stay the course. It’s easy to speculate that perhaps Nokia could have gone the way of Samsung, which was also a big player in the pre-smartphone era, but somehow managed to avoid obsoletion and grow even more dominant today. 

But it’s only easy to say that now, with the benefit of hindsight and zero personal stakes in the matter. I don’t know what it must have felt like to be in their position at the time. I’m sure it wasn’t easy to see clearly.

When a key Nokia executive—one of the visionaries behind their domination of 90s and early 2000’s—was asked at the time why the Finnish mobile behemoth didn’t abandon their inferior OS and switch to Android, this is what he had to say:

Switching to Android would be like peeing in your pants to keep warm in the winter: temporary relief is followed by an even worse predicament.

This obviously did not turn out to be correct. There are many Android smartphone makers that are in a much better position than Nokia is today.

Why couldn’t Nokia see it?

2

When thinking through a business’s strategy, most of us naturally start with the most basic, immediate questions: What job does the product do? Why now? Any significant dependencies? What alternatives exist, and how do they compare? Rationalists call this the ‘object level’ discussion.

But at a certain point, in order to make sense of all the detail in the object level, the focus must shift to the meta level: general principles of business strategy, like knowledge of how markets work, where power tends to accrete in value chains, and the forces that drive consumer and organizational behavior. Any analysis happening at the object level depends on the strength of the generally applicable paradigms we’re using from the meta level.

Pretty much everything I’ve written in Divinations so far falls into one of these two levels, about a specific company (object level) or strategy principle (meta level).

But based on my experience of the past year, I’m coming to realize there is a third level that is also extremely useful to understand, because the other two levels rest on it: the psychology of strategy creation.

If the object level is about the specifics of an individual business, and the meta level is about the general principles of business strategy, then the psychology layer is about understanding our cognitive and emotional instincts, and how they influence our strategic decisions and behavior.

Based on my own recent experience, I’m realizing just how important it is to become familiar with the mistakes many managers make on this level.