Behavioral Strategy: How Companies Can Harness the Power of Psychology

In an attempt to better understand how people (i.e., customers or other important stakeholders) think, many companies have turned to psychology: there’s behavioral finance, change management, and behavioral marketing, to name just a few examples. What’s more, psychological insights are also well suited to inform managers’ strategic planning: enter behavioral strategy. Strategy expert Bernhard Scherzinger and Konrad Holleis, Head of Executive Education at the WU Executive Academy, explain what companies stand to gain from behavioral strategy and how this expertise can be put into practice. 

A supermarket shelf stocked with 30 different kinds of jam might come across as an enticing and generous selection for consumers to choose from. Yet research shows that narrowing down the variety to, say, five or six products results in a significant increase of sales in this product category. Turns out customers don’t make a purchase when they feel overwhelmed by too many options, preferring a smaller selection. For a long time already, such psychological knowledge about the behavior of people has been put to good use in business. At the same time, the application of this theory has been restricted to a few choice fields so far, and particularly when it comes to strategy development, the existing potential has not yet been tapped.  

But that’s about to change: Bernhard Scherzinger considers behavioral strategy an unstoppable trend. The managing director of Management Results Consulting, a Viennese consulting firm with a strong focus on strategy advisory, has also been a lecturer at the WU Executive Academy for many years. “In behavioral strategy, we bring together insights from psychology, consumer behavior, and behavioral economics in order to develop successful strategies. All of these things beautifully complement the classic strategy methods. And while economists turned to psychology a long time ago, executives and managers are only now catching up,” Scherzinger points out. He sees the beginning of what he refers to as “a huge wave.” 

So what can behavioral strategy do for us? “It’s a secret weapon enabling you to convince people or get them to agree with you,” the strategy expert says. Just as in other approaches to strategy development, behavioral strategy seeks to improve the client’s market position, cost position, and innovative output. What sets it apart is that it also investigates the behavior of different stakeholders. 

The overall objective of behavioral strategy is to help organizations increase customer satisfaction and thus revenues and profits. “Put very simply, it’s about building rapport and befriending customers. Psychological insights tell you how to do that, for instance revealing that emphasizing shared interests and praising others leads to more effective communication. It’s not about misleading or tricking others but focusing on creating a benefit for the customer,” says Konrad Holleis, who has collaborated with Bernhard Scherzinger for many years in developing custom-made executive training programs in strategy for managers and companies at the WU Executive Academy.  

“International studies have shown that psychological insights, such as providing a consistent explanation for a planned strategic measure, lets employees’ approval rate climb from 60% to 90%. This, in turn, means that you can considerably soften employees’ resistance towards new strategies by educating your team about the plan, involving them in the decision-making process, and supporting them in the implementation phase,” Konrad Holleis says. 

In the following, Bernhard Scherzinger presents three examples that show how companies successfully use behavioral strategy to influence purchasing decisions and increase customer satisfaction! 

1. Example: The Influence of Choice on Purchasing Decisions 

A pastry shop offers its signature cake in two sizes. By adding a third, larger cake to its offer, more customers will opt for the medium-sized cake and also feel more content with this choice. This is true because people are naturally inclined to take the middle road. They would rather choose a product that falls somewhere in between what they need (the minimum) and what they can afford (the maximum). An additional insight from behavioral strategy is to offer customers the choice (e.g. on a sign in the shop window) to choose none of the options. The mere existence of another option (in this example: to remain cake-less) helps customers make up their mind. And they will also feel more assured of having made the right decision. After all, they could have just as well opted out of buying anything. 

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2. Example: How Trust Increases Sales 

A waiter or waitress in a restaurant who repeats patrons’ orders can expect up to 70% more tip just for doing so. This technique is an example of the use of behavioral strategy, in which the principle of confirmation is used to strengthen the trust of guests and increase their satisfaction. 

3. Example: The Effect of Positive Reinforcement on Customer Satisfaction 

A stylist in a beauty parlor who assures customers that “they look great in anything” gets 37% more tip. People love compliments so much that they also do the trick when it’s clear that a bit of sweet-talking is involved. 

Konrad Holleis, Head of Executive Education at the WU Executive Academy, has no doubt about the power of behavioral strategy: “Psychology will be an indispensable pillar of strategy development in the future and become an additional instrument providing comprehensive knowledge about human behavior.” Particularly when combined with other methods, it can serve to develop and implement concrete, future-proof strategies. And it’s this practical application that makes behavioral strategy so effective, as Bernhard Scherzinger explains: “Small experiments that are easy to carry out are all it takes to test if and how something can work (better).”  

This can be demonstrated by a further example from the hospitality industry: tests have shown that it depends on (more or less well-executed) signs whether or not guests will reuse their towels. If the signs point out that the majority of visitors to this hotel reuse their towels, more guests will follow suit. And the approval rate will grow even further if the sign states that the eco-friendly guests stayed in this very room.  

Such approaches should be tried out by conducting experiments, as is natural for start-ups or universities. It’s also a good idea to tap the knowledge of employees since they often have a good hunch regarding customers’ and partners’ expectations or reactions. 

Strategy expert Bernard Scherzinger has three tips for managers and companies looking to progressively implement behavioral strategy in their company:  

1. Tip: Learn the Basics of Behavioral Strategy 

Successful implementation first requires knowledge and understanding of the advantages and possible applications of behavioral strategy. There is a wealth of very practice-oriented literature on the topic. Bernard Scherzinger’s recommendations are Nobel laureate Daniel Kahneman’s “Thinking, Fast and Slow,” works by the Israeli-American psychology professor Dan Ariely or by the US psychologist Robert Cialdini, particularly his most famous book: “Influence: The Psychology of Persuasion.” But what’s most effective are targeted further education programs enabling an exchange with peers: Bernard Scherzinger teaches behavioral strategy in the Competitive Analysis & Strategy module of the Business Core of the Vienna Executive MBA, and he also teaches classes on the subject in the two short-term continuing education programs Senior Leadership and Strategic Management for Executives. 
 

2. Tip: Benefit from Strategic Consulting 

Experienced consultants, hired to moderate strategy workshops, ensure that the right questions are asked and answered and can provide valuable support to organizations. Such experts can contribute knowledge about benchmarks and best practices from other companies and industries, which can further enhance strategy development. Their experience helps spot early on when an organization is headed in the wrong direction. They also probe potential pain points of the suggested strategy, contributing to a higher success rate.  

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3. Tip: Anchor Psychological Principles 

Strategy teams should include experienced psychologists, who join the (top) management and experts from sales, marketing, and HR in strategy development workshops. Together, they can then discuss and prioritize the options available to the company. 
 

4. Tip: Use AI to Optimize the Use of Behavioral Strategy 

Today, it’s crucial for any organization to consider the impact of artificial intelligence (AI) on its business when developing a strategy. After all, AI has the potential of massively improving the development and implementation of behavioral strategy by analyzing large amounts of data efficiently and identifying patterns the human mind would perhaps not spot. This can help companies understand the behavior and preferences of their customers even better and keep a watchful eye on competitors and their activities. Large Language Models (LLM) currently in use, among them ChatGPT, are trained on gigantic amounts of text data. Already now, they are capable of suggesting solutions to strategic questions – provided the data quality is good to begin with.  

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