House, MBA: What Strategists Can Learn from TV's Nastiest Doctor

Ten years ago, the Great Recession was in full swing. Consumers and companies were hurting.

Retailers were confused. In “Safeway Shifts Tactics in Grocery Price War”, the Wall Street Journal reported (October 16, 2009) these contradictory positions:

“Last month, [Safeway CEO Steve] Burd conceded had the chain moved quicker to lower prices, it would be ‘doing a bit better than we are now.’”

“Increased use of promotions ‘destroyed our gross margin,’ Supervalu CEO Craig Herkert said last month at a Goldman Sachs conference. ‘More items really cheap don’t bring in more people.’”

There is truth in the notion that pricing high is good and in the notion that pricing low is good. There is truth in focus and in diversifying. There is truth in leadership and delegation, caution and action, mass marketing and segmentation, stability and innovation, left and right, this and that. Pick a stance, pick a buzzword, pick a fad; there’s probably truth in it, and in its opposite.

Yet it seems there’s something missing in those notions. Both Mr. Burd and Mr. Herkert were dissatisfied with their results. Each CEO wished, if just a little, that he’d done what the other had done… and what the other was blaming for his dissatisfaction.

Mr. Burd and Mr. Herkert were experienced, high-powered professionals with plenty of data and advice, yet they chose opposite actions. I truly sympathize with them. Their huge companies were in the ER and they had to cure what ailed them.

Let’s consult with Gregory House, fictitious M.D., of the eponymous 2004-12 TV show. If you like House, he’s the witty, incisive doctor who coolly, unrelentingly pursues answers. If you don’t like House, he’s the nasty, sarcastic doctor who coldly, unrelentingly pursues conflict. But cool or cold, he cures.

Yes, House (the show) is fictitious and, I’m told, unrealistic. Still, the show beautifully illustrates how to get insight into tough strategy questions rigorously and effectively.

House (the doctor) begins by writing symptoms on a whiteboard. That’s significant for three reasons: he can add, he can erase, and he keeps everything in view. He writes “high blood pressure” and “headache” without detail or precision, partly because watching someone scrawl numbers isn’t exciting television, partly because it keeps him and his team focused on the big picture.

Strategy equivalent: I’ve seen, and I’m sure you have too, businesspeople debate detail. There’s time for that later. Let’s figure out first whether anyone is suffering from malignant prices.

For Mr. Burd and Mr. Herkert, the key symptom is pain in the profit: performance below expectations. Prices are not symptoms, and their role in the symptoms has not yet been determined.

House writes symptoms without presumption. He may write “high blood pressure” and “headache;” he doesn’t write “headache from high blood pressure.” He and his staff are free to link high blood pressure and headache as they diagnose, but they don’t presume it. Something else might cause both, such as a side effect from medication or a thrillingly obscure disease. A symptom might even be irrelevant or temporary; the headache might vanish after the morning’s 17 espressos wear off. He also collects relevant information about the patient.

Strategy equivalent: Gather relevant business, competitive, and market information, and stay neutral. Notice the difference between “our prices are too high” (presumptive) and “our prices are 10% above competitors’” (neutral). Note, too, that SWOT (strengths, weaknesses, opportunities, and threats) analysis forces interpretation. Is it a strength or a weakness to price 10% above competitors? (Next time you use SWOT, try reversing the column headings after you’ve filled in the table.)

Mr. Burd and Mr. Herkert would presumably know that the other is suffering too. They’d know also that they have similar big-retailer business models. They can readily measure prices in their markets.

Next, House starts fights. He doesn’t hold back his critiques as his staff suggests possible diagnoses. His staff doesn’t hold back their critiques as he suggests possible diagnoses. The fighting gets heated but everyone is clear that the objective is to diagnose and cure the patient. A few rules guide the fighting: 1) treat causes, not symptoms; 2) find causes that fit all the symptoms; and 3) you do your job by participating in the fight.

Strategy equivalent: Debate. Use brainstorming, scenarios, war-gaming, or what-if simulations. Resist anecdotal reasoning and jumping to conclusions. Participate.

Unfortunately, in business there is great pressure to advocate rather than debate and to act rather than diagnose. Moreover, strategists simply do not have the equivalent of medical literature drawing on centuries of science. Without that deep knowledge it becomes especially important to challenge assumptions and look for causal mechanisms. Ask yourself what would have to happen for a price cut to work for Supervalu or for steady prices to work for Safeway. Hint: don’t stop at one or two items.

Mr. Burd and Mr. Herkert made different price moves, presumably after thoughtful financial analysis. Both were dissatisfied. That suggests the price moves might not have caused dissatisfaction for the same reason that we’d say 17 espressos might not cause a headache if identical twins got headaches but only one had 17 espressos.

What else could it be? Perhaps Safeway and Supervalu had something else in common that could causally explain their shared unhappiness. Similar business models that don’t fit a new economic climate? New competition? Demographic change? Inappropriate expectations? Notice that the symptom a few paragraphs ago — “performance below expectations” — makes it easier to consider inappropriate expectations than “failure to hit targets” would.

Finally, House adjudicates the fights. He tests hypotheses and avoids judgment calls. If the 17 espressos caused the headache but not the high blood pressure, then the headache will fade as the espressos wear off, but the blood pressure will stay high. Notice that it doesn’t completely confirm the role of the 17 espressos in the headache. If the patient had sipped the espressos at an outdoor café during rush hour, the headache might be the result of exhaust fumes, not espressos. House could administer a new batch of espressos in clean air to test whether 17 espressos can cause a headache.

Strategy equivalent: Think like an experimenter. For example, think of Mr. Herkert’s statement as a hypothesis that low prices destroyed Supervalu’s gross margin and didn’t bring in more people. Think of Mr. Burd’s hypothesis that they could have done better if they’d cut prices sooner. How can we confirm or reject it? Perhaps look at comparable businesses that took those actions. Survey customers. Run simulations.

Be careful how you measure. In a recession, “not bringing in more people” may be success, if other businesses are bringing in fewer people. Watch out for the exhaust-fumes problem. What else was going on at the same time that Safeway held its price and Supervalu increased its promotions? The other-things-going-on might have involved competitors or the economy, and might have nothing to do with Safeway and Supervalu or their prices.

If we ran experiments (comparables, surveys, simulations), what might we find?

• It wouldn’t surprise us to discover that comparable businesses were disappointed with their results too. That would suggest Mr. Burd and Mr. Heckert didn’t do something uniquely wrong.
• It wouldn’t surprise us to find that customers cut back on purchases (buying less and/or buying cheaper) to deal with the economic crisis. That, too, would suggest nothing unique about Mr. Burd and Mr. Herkert.
• It wouldn’t surprise us to find that simulations show it’s possible to succeed with steady or lower prices, if the rest of the business adjusts appropriately (reduce capacity, negotiate lower prices from suppliers, buy lower-end goods, etc.). Did Mr. Burd and Mr. Herkert make such adjustments? How long would they take?
• We could measure competitors’ results. If Safeway and Supervalu outperformed competitors, then we might conclude they actually did well. In other words, the diagnosis might be unrealistically high expectations, and the treatment is to change expectations.

House, M.D., sees, diagnoses, and treats the body as a whole. A headache doesn’t necessarily start in the head and high blood pressure doesn’t necessarily start in the heart.

House, MBA, sees, diagnoses, and treats the business as a whole. There’s more to the story than price and dissatisfaction.

See also “Yes, You Can Raise Prices in a Downturn,” an interview with Benson P. Shapiro (Harvard Business School), Frank V. Cespedes (Harvard Business School), and Elliot Ross (President of The MFL Group in Beachwood, Ohio).

This is an update to an article I published on my company’s blog in 2009. The CEOs named in the article are no longer the CEOs of their respective companies.

Keywords: #strategy #businesswargames #strategicthinking