The blue pill or the red pill?

Updated: Jul 22, 2021

What do all these have in common:

  1. The corporate CEO whose top executives are more focused on undermining each other than working to achieve his vision.

  2. The company investing $30M CapEx to upgrade a product that nobody wants (even after the upgrade).

  3. The private equity company who turned down an unsolicited $100M+ offer for one of their portfolio companies only to then sell it for far less shortly thereafter.

As it turns out, the common element here is that they all took the blue pill.

That is to say, they all chose to ignore a difficult truth so they could continue to believe a comfortable falsehood. But why?

1. Ideology:

The unsupported CEO had created an organization structure based on his philosophical faith in free, competitive markets, and set up the internal financial incentives for his top team to compete with each other for resources and prominence, not to cooperate to achieve his vision.

And that's exactly what they did, bringing about bitter infighting and operational paralysis to the great detriment of the company's brand and market share. Many tried point out this problem to the CEO, but he didn't want to swallow that red pill and see the truth. He refused to listen, stubbornly clinging to his blue pill of philosophical conviction.

2. Pride:

The company who flushed $30M down the drain was losing market share and its historically luminous brand reputation was on the wane, but it still had one big winner: dominant market share in a particular product category. Unfortunately, this product category was dying out as customers were switching over into new, more desirable technologies. But instead of taking the unpleasant red pill of investing in new tech where the market was headed, they doubled down on re-investing in the comfortable blue pill of the old.

The executives, marketers and engineers at headquarters couldn't bring themselves to admit that their one remaining jewel in the corporate crown -- their shining star from the past -- was no longer commercially relevant. Their pride didn't allow for it, even though the customers and dealers and field sales teams were clear that retreading the old tech was the wrong path to take. Two years later, after continued steep declines, they were forced to cease production in that category and wrote off their investment as a total loss.

3. Greed:

The private equity company got a surprise one month -- an unsolicited offer from a strategic buyer for one of their portfolio companies. The opening offer, even before negotiations, was $100M+, a nice fat multiple of current EBITDA. Management saw revenues turning down as the economy was headed into recession and knew that big CapEx requirements lay ahead, critically needed for the firm to stay competitive. So management recommended that ownership make the deal and sell.

But negotiations never happened. The PE firm responded curtly, even rudely, to the potential suitor, asserting that their initial offer was offensively low. An insult! Management protested -- just look at the numbers -- things are not trending well with this recession. But the PE firm had starry-eyed blue pill visions of a $1B rollup platform "unicorn." Their greed blinded them to the red pill of truth, and so the buyer walked. Then a bit further into the downturn, ownership decided that, yes, they did actually want out. There would be no unicorn. They got a clean exit, but at a fraction of the valuation they could have had before.

What's Going On Here?

In addition to the three boogeymen noted above (ideology, pride, and greed), fear and simple laziness can also cause leaders to ignore the hard data before them and instead push their agendas from a standpoint of ignorance or false belief. Often enough, the results are not pretty.

"A point of view can be a dangerous luxury when substituted for insight and understanding."

-- Marshall McLuhan

Cognitive psychology and behavioral economics teach us that human beings are surprisingly good at avoiding or refusing to acknowledge information that conflicts with our existing beliefs. Doing so enables us to avoid unpleasant cognitive dissonances, and we humans are prone to a wide array of cognitive biases that degrade our decision-making capabilities. With training and practice, these can be mitigated if not overcome -- we can learn to be more dedicated to facts and truth, and thus better decision makers as a result.

Ignorance may be bliss. The blue pill may be easier to swallow. But as a leader, it's your responsibility to yourself and your organization to face up to hard realities so you can make truly informed, wise decisions. Take the red pill.