Four ways to make better business decisions in challenging times
How can leaders can make better business decisions on key issues in the current economic environment? UNSW Business School’s Mandy Cheng and Kerry Humphreys outline a four-step process
Organisations resuming their “new normal” operations find themselves facing an unfamiliar and uncertain business landscape. It is now more important than ever for managers and business leaders to make effective decisions as they lead their teams out of the economy’s hibernation.
For example, how do we reshape our supply chain to minimise further interruptions? What do we need to do to optimally allocate limited resources across competing priorities? What assumptions do we challenge when performing strategic scenario analyses? Managers making effective business decisions ordinarily benefit from the experience they bring to the task; yet in the current, unfamiliar environment, there are no playbooks and no precedents to rely on, and decision making becomes more challenging.
Here are four ways to become a more effective decision-maker in an unfamiliar business environment.
1. Foster analogical thinking
Analogical thinking involves mapping the current problem to a similar issue in managers’ experience repertoire. Sound analogical thinking requires seeing beyond superficial similarities to also identify “deep similarities” (as described by Gentner & Smith in their 2012 paper on Analogical Reasoning): that is, to look for less obvious underlying characteristics between decision scenarios.
For example, consider a manager who is faced with multiple and significant supply chain interruptions that threaten her company’s ability to deliver their products. While the manager has no previous experience of similar, pandemic-induced supply chain issues, she may recognise underlying similarities between the current challenge and her prior experience when managing a sudden shift in customer demands – both scenarios require an immediate rebalancing of the company’s product mix. The ability to transfer prior experiences to novel contexts allows managers to face unexpected challenges in their stride.
2. Develop a learning orientation
Typically, we ask managers to adopt a performance orientation, with the goal of demonstrating existing competencies to outperform the competition. During this global pandemic, with businesses and countries in lockdown and economic and social activity curtailed, a shift to managing with a learning orientation is especially valuable.
We are familiar with a learning orientation in the classroom, where students are taught and apply new content, then by developing a habit of reflection, they learn to integrate what they are experiencing with their existing mental model to develop a new frame of reference. Put simply, they experience, reflect, learn and then adapt.
In the unfamiliar business environment we now face, a learning orientation – with its awareness of current experiences and practice of reflection – is vital. Think of the manager with revenue down, cash flow constrained, employees learning to work together from home, and supply chains disrupted.
A learning orientation moves away from a goal to excel and outperform in this complex, unfamiliar setting – and instead asks the manager to reflect on what they are experiencing, learn and adapt. Not only does this reduce anxiety, but it also provides the imperative to reflect on the challenges faced and opportunities opening up to make effective decisions on the path moving forward.
3. Adopt a systems thinking perspective
With social media images of empty toilet paper shelves reappearing and the reintroduction of buying limits by Coles and Woolworths, we are reminded of Jay Forrester’s ‘beer distribution game’ (see Sterman’s 2015 paper on Booms, Busts, and Beer: Understanding the Dynamics of Supply Chains). The late MIT Professor developed this game to illustrate the importance of systems thinking for understanding the complex systems in which we operate. In the case of the beer game, when we fail to appreciate the delays between our decisions to order a beer and the time it takes to supply this in a complex system, supply chain volatility results – each and every time the beer game is played.
With this mismatch in supply and demand, comes hoarding behaviour as customers stockpile from the small supply that arrives in-store, causing retailers to order more product, production goes into overdrive, and the cycle continues. Sound familiar? Replace beer with toilet paper, and this game reflects our pandemic reality.
Systems thinking equips managers to make sense of complex business systems and help manage business problems. When organisations map out their business system to understand the various parts, the causal relationships between these parts, and where time delays exist in these relationships, managers are able to pause once they make a decision and wait to observe its effect on the system after these time lags have passed (see Humphreys et al’s 2016 paper on Dynamic Decision Making Using the Balanced Scorecard Framework).
Without this knowledge, small variations in demand can lead to exponential shifts along the supply chain. In the current unfamiliar business environment, characterised by large variations in demand (favourable in some industries, unfavourable in others), systems thinking offers a valuable perspective.
4. Avoid these decision traps
Many of us are aware of biases that can affect the quality of our decisions. In times of crisis and heightened uncertainties, when we feel overwhelmed by information and choices, it becomes even easier to fall into common decision traps. Three decision traps are particularly dangerous in the current environment:
1. Misattribution – not everything is about the pandemic: the incorrect attribution of a cause to an outcome just because the two happen together. As the global pandemic is such a salient event, it is easy for managers to incorrectly conclude that it has caused all the problems they now see, such as poor cash flows and declining customer demand. In doing so, managers may fail to identify the true, non-pandemic related cause that has negatively affected performance, such as their business strategy. With the true cause of business underperformance left unaddressed, incorrect attributions can severely impact on businesses’ ability to remain competitive post-COVID.
2. Confirmation bias – sometimes it is too good to be true: the desire to regain control in a chaotic world can further managers’ tendency to pay attention only to favourable information, especially those that confirm their personal beliefs. A small jump in revenue may be conclusively interpreted as a signal of a successful recovery strategy, despite the existence of other negative signals such as increases in order cancellation and delayed payments by customers.
3. Groupthink – the dark side of consensus: the strong concurrence-seeking tendency that can result from in-group pressures when making a team-based decision (see Janis’ 1982 paper on Groupthink: Psychological Studies of Policy Decisions and Fiascos). Let’s consider a restaurant chain’s management team who are working together to identify new revenue streams to address the declines in core revenue experienced during shutdown. Groupthink may occur when a particularly vocal team member expresses an initial idea, the supportive team immediately concurs and works together to build on the idea; or in the version of this scenario that is sometimes referred to as ‘sunflower bias’, a team leader expresses a preference and the team follows along.
During this pandemic, with many team members still working from home and a desire to work together collegially, we are more likely to display a well-intentioned tendency for consensus. It is important to remember that two key benefits from team decision making are diversification and interaction effects (see Trotman et al’s 2015 paper on Group judgment and decision making in auditing: Past and future research).
By reaching consensus too early, we miss the benefits from diversification. Leaders need to allow time for all team members to contribute their ideas; in this case, ensuring many ideas for potential new revenue streams are heard. In an online environment, this means keeping team meetings small and encouraging everyone to contribute; or where larger team meetings are required, offering an alternative channel for contributing ideas in advance of team discussions.
For more information contact Mandy Cheng, AGSM Scholar, Professor and Head of the School of Accounting, and Kerry Humphreys, Associate Professor, AGSM Scholar, and Deputy Head of the School of Accounting at UNSW Business School.