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The science of business: Decisions – and how to get them right
How do businesses make good decisions in hard times?
The present economic turbulence makes strategic decision making difficult at precisely the time when it is more important than ever for organisations to choose the right course of action.
Short-term problems such as credit restrictions and reductions in demand for goods and services, mean that businesses need to take action now, but without jeopardising those opportunities that are likely to be available when the economy picks up and demand increases.
Predicting economic change and its implications for an organisation's activities is crucial – but how well equipped are strategic decision-makers to balance short- and long-term issues and to forecast how market changes will impact their organisation?
Research shows that in many cases, strategic thinking is flawed and leads organisations to make the wrong choices.
A major constraining factor on strategic choice is that people are limited in their capacity for thinking, so in complex situations they use simple intuitive rules, following their gut instincts rather than using their head to make a more analytical evaluation.
These intuitive rules are used both at the very early stages of the strategic process – when managers are trying to make sense of the situation – and at later stages when developing and evaluating strategic alternatives.
For example, one very common approach is to match the present situation to those experienced before and simply implement what worked in the past. This has the advantage of providing a solution to what might otherwise seem an intractable problem and provides a good rationale to convince themselves and others that they have taken the right action.
However, there are some significant disadvantages. Research shows that strategists often fail to take account of crucial differences between the present and the previous situation.
For example, at the end of the Second World War, the chief executive of Montgomery Ward, a major US retailer, was so convinced that there would be a recession on the basis of what had happened at the end of the First World War, that he resisted all internal advice to expand in order to challenge Sears, their major competitor. That decision led to a permanent loss of market share and, eventually, to closure.
As researchers understand more about the intuitive thinking rules used by strategists, it has become much clearer that they play a crucial role in organisational failure.
So what can organisations do to overcome these problems and improve their strategic decision making?
First, senior decision-makers need to understand more about their own thinking strategies and the potential weaknesses, and adopt procedures for thinking smarter. Recent research has outlined and tested several useful procedures to achieve this.
For example, managers can be trained in "considering the opposite thinking" which involves challenging initial assumptions, and overcomes the natural tendency to focus on evidence that simply supports initial views of the problem.
Second, organisations need to ensure that strategic judgments and decisions based on intuition are complemented by analytical procedures that involve a more detailed, intelligence-led, analysis of the current situation and the possible actions that can be taken to deal with it. These analytical procedures are well understood and easily implemented, but rarely used.
However, the real key to effective strategic decision making is not to rely simply on intuition or detailed analysis but rather to bring both perspectives to bear on the problem.
John Maule is Professor of Human Decision Making and Director of the Centre for Decision Research at Leeds University Business School.
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Wednesday 23 May 2012
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