Business Logic; Bad Logic, Poor Business

We see and read fallacies in logic every day. I am sure that there is a chance that even in this august newspaper there has been the odd fallacy in logic which escaped the eagle eyes of the editors. In this very column, I am sure that at times I have made an error in logic even though I pride myself in being logical.

Fallacies in logic in a journal or newspaper or a conversation between people creates frustration and perhaps heated discussion. Fallacies in logic in business create a bad business.

A simple fallacy that occurs when market research is poorly interpreted is to argue from selected observation. Data from a handful of people is interpreted as being representative of a whole population. This happens frequently when the boss has a pet theory about the market, commissions some market research and concentrates their argument on the few pieces of data which support their argument.

The impact of business decisions being made from selected observations is to put the marketing campaign or the entire company at a risk equivalent to deciding by "gut feel". Some leaders have a great gut feel for their business and the businesses thrive on it. Most of us, however, actually need information to make logical decisions.

In one organisation I have seen good market research which was carried out annually for ten years demonstrating clearly that the single channel strategy of the organisation was causing a decline in volumes of an average of 7.5% per annum as other channels blossomed. It also contained some data which showed that the new channels had a lower sell out price.

The argument was that the lower sell out price would reduce profit whilst the lower volume from the single channel strategy was ignored. Only the information which justified the status quo was ever used out of the data.

Another fallacy common in business is internal contradiction. This clearly occurs with the topic of company values. That is, we have company values but leaders do not have to portray them. It also occurs with strategy and tactics.

For example, the statement, "Our strategy is to grow the market through an aggressive marketing and sales campaign and to dominate the new market we create" on page five of a corporate plan, followed on page ten with no increase in advertising costs, marketing costs or sales costs and no other plan to increase productivity of sales either. Growing the market aggressively without some increase in sales costs or sales productivity is not believable.

Another favourite of mine is argument by slogan. The most common one I hear is "best practice". The CEO announces "We are adopting best practice in the area of corporate governance; therefore we need to increase the remuneration of the directors". What in the world did that mean? There is no way to understand specifically what best practice means and whether it has any relevance to the director's remuneration.

Best practice is very hard to actually achieve. It is difficult between different organisations in different environments to define processes in a similar enough way to make it worthwhile to go the next step and define KPIs measured the same way to begin to compare results to see who has best practice.

Even if the foregoing is achieved, it is incredibly difficult to take one practice from one business culture and place it in another. Instead, it is a lot easier to argue by slogan.

Another favourite is the monthly reports which hit the CEO's desk and declare that sales were down this month because a segment of our market did not buy as much. Statements like these abound in monthly and annual reports begging the question, "Why did they not buy as much?"

Sadly, the begged question is rarely answered. Worse still, too frequently, it is not challenged by the CEO for the poor piece of analysis with rotten logic that it is.

Of course, the time honoured fallacy of logic in business is the appeal to widespread belief or the "Bandwagon argument". For example, "Everybody else thought the internet was going to be the only way to sell, so we had to spend millions on it too."

Another bandwagon argument example I see which troubles me more is that every organisation HAS to have a vision statement, a mission statement and a set of values to have a decent strategy. This is not true. I could run an equally fallacious argument the other way. From my observations, those organisations which spend a lot of time on vision and mission usually have no actual strategy.

Doing business or running a public service entity is tough work for CEOs. That is why they get paid well. What they don't need are self inflicted problems through tolerance of bad business logic.

WOODRIDGE

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Business Logic; Bad Logic, Poor Business