THE BLOG
11/18/2014 05:59 am ET Updated Jan 18, 2015

The Golden Triangle

"Business thinking starts with an intuitive choice of assumptions. Its progress as analysis is intertwined with intuition. The final choice is almost always intuitive. If that were not true, all problems would be solved by mathematicians." So starts a provocative and seminal essay by Bruce Henderson in 1977, the year after I joined his Boston Consulting Group.

Intuition, says Bruce, is enormously powerful -- "it is the subconscious integration of all the experiences, conditioning, and knowledge of a lifetime, including the emotional and cultural biases of that lifetime."

Intuition is great, but not enough

But, he continues, "intuition alone is never enough. Alone, it can be disastrously wrong." Analysis is also necessary to check that the intuition is correct -- facts need to be gathered, data checked, assumptions tested, new views developed. Yet the relationship between analysis and intuition is subtle, interactive, and continuous. Intuition is necessary to decide what analysis is necessary -- "don't go to the library," Bruce says, "and read all the books before you know what you want to learn." This requires selectivity driven by intuitive insight -- "analysis, too, can be disastrously wrong. Analysis requires keeping the required data to manageable proportions. Thus analysis by its very nature requires initial oversimplification and intuitive choice of starting assumptions. All of these choices are intuitive. A mistake in any one can be fatal to the analysis."

Yet there is a problem here. There are too opposite dangers with analysis. One is that all it does is to confirm the intuition, which adds little to where we started -- "when the results of analysis and intuition coincide, there is little gained except confidence." Counter-intuitive answers from the analysis are potentially helpful, and need to be checked carefully to see whether they are correct and why, relative to the starting assumptions. "But in nearly all problem solving there is a universe of alternative choices, most of which must be discarded without more than cursory attention. To do otherwise is to incur costs beyond the value of any solution," leading to what we now call "analysis paralysis."

Intuition, Analysis, and the Missing Ingredient

Therefore, Bruce announces, pulling his rabbit from the hat, "A frame of reference is needed to screen the intuitive selection of assumptions, relevance of data, methodology, and implicit value judgments. That frame of reference is the concept."

"Conceptual thinking," he continues, "is the skeleton or framework on which all the other choices are sorted out. A concept is by its very nature an oversimplification. Yet its fundamental relationships are so powerful and important that they will tend to override all except the most extreme exceptions."

All my working life I have striven to find concepts that can guide us and be the framework for both intuition and analysis. Concepts tell us where to look, what to check, how to isolate what is most valuable, how to save time, how to acquire life- or business-changing confidence, how to make money, and how to find peace of mind. Concepts are like the radar guiding a plane, the engine and fuel powering a car, or the brain directing our bodies.

And the truth about concepts is, of course, that they are subject to the 80/20 principle. Most concepts are not very useful, or positively harmful. A few are useful. A very small proportion of concepts are so useful that they can transform our business or our life.

A Few Business-Changing Concepts

Bruce was pretty coy about this in his essay, but the real motor behind the Boston Consulting Group in its first two or three decades -- and the power behind its rival firms, such as Bain & Company, and the firm I co-founded, LEK -- was its concepts. There were just three that were extremely powerful:

• The experience curve, leading to the conclusion that having the leading market share was valuable because it led to lower costs than rivals

• The growth-share matrix (the famous Boston box) which led to what I call the star principle -- by far the most valuable type of business is one that has the leading market share in a high growth market

• More generally, the whole concept of competitive advantage -- that a business has to have a unique advantage over all its rivals -- something valued by customers that it can do much better or at lower cost than rivals, or that it can do and rivals can't do at all

In addition, I think there are three other concepts relevant to business (and to our personal lives) that are incredibly powerful:

• The 80/20 principle -- there are nearly always a small minority of products, customers, business methods, and other considerations that determine the great majority of the real profits and cash flow of a business; and in our lives, there is a small minority of our time, relationships, career moves, decisions, and other considerations that give us the majority of our happiness and value to other people

• The strength of weak links -- the value to us of cultivating and maintaining loose but friendly relationships with a many people who move in different worlds from ourselves, and therefore have access to information and insights that we don't get from our family, friends, and members of our business circle

• The value of two different kinds of simplifying -- to be described in a forthcoming book of mine.

The Golden Triangle

Concepts are valuable because they give you the hypotheses for what likely answers may be, enabling both intuition and analysis to be well directed. Concepts can also save a lot of time and energy by eliminating the majority of options from consideration. To give a couple of important examples:

• The Star Principle leads to the conclusion that 19 out of 20 business ideas or investments -- whether for managers, venture capitalists, or individuals -- are not even worth studying. These are businesses that do not and will not qualify as stars -- either they can't seize market leadership, or they are not in markets that are growing fast. Put the onus on their proponents to sustain a hard hypothesis -- that a non-star can become a star. Evidence for the hypothesis must be very strong to overrule the negative presumption generated by the concept.

• On the other hand, analysis to establish or confirm which products and customers are the most profitable is always helpful. Without that knowledge, we are flying blind.

This chart shows how concepts can increase the accuracy and value of both intuition and analysis.

An excellent concept invites us to use our intuition and find new applications for the concept. Intuition then leads to hypotheses. Analysis then tests the hypotheses. If confirmed, action results. If the analysis reveals a more complex picture, it can act as a further spur to intuition, to devise a better set of hypotheses. And so on, until there is something worth testing in the marketplace.

Have the relative value of concepts, intuition & analysis changed?

Bruce was writing when the "analysis industry" in consulting, industry, and finance was just getting into its stride. BCG did not sell experience, relying on the intuition of clients. BCG sold concepts allied to analysis. Before long, though, analysis increasingly took precedence. Today analysis - usually undertaken to "prove" intuitive decisions - seems completely dominant. Often the managers concerned are unaware that they are making intuitive decisions, and that the analysis is effectively rigged by the assumptions made. The test is the one implicit in Bruce Henderson's essay - if analysis rarely reveals counter-intuitive results, the analysis is worthless.

Because concepts are largely in abeyance, and intuition is mainly imprisoned within conventional wisdom, the hegemony of analysis is trivial or harmful. It is time for a comeback of unconventional intuition, guided by the few great concepts.

Action Implications

1. Collect and thoroughly understand the best business concepts. (You can reliably start with the ones I list above!)

2. Give free rein to your unconventional intuition. It is unconventional if, and only if, it leads to new conclusions. Try this type of intuition within a small group of conspirators who come from different backgrounds and have diverse experience.

3. Focus on one type of business, defined unconventionally (your definition should cut across established categories). This will enable your intuition to be progressively heightened, validated, and extended.

4. Conduct analysis to disprove, enrich, or amend hypotheses. If the analysis just confirms the hypothesis, be on your guard. Almost certainly, the analysis is not useful and it may lead you to perdition.

5. Spend at least an hour a day thinking deeply about your business and why some segments are more attractive than others; and where and why other firms who are rivals or in adjacent markets are spectacularly successful.

Next week, I will consider a few concepts which are most helpful in making us happy and useful as individuals.

Bruce Henderson's essay on Business Thinking can be found on pages 260-3 of "Perspectives on Strategy from The Boston Consulting Group", edited by Carl W Stern and George Stalk Jr. It is well worth reading and pondering.

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