By Wayne Borchardt
History is replete with examples of organisations making fatal errors in their decision making – leading to a major loss of market share or even extinction. As South Africa heads into uncertain economic and political times, how can local businesses avoid falling into the same trap?
Tales of disaster never fail to intrigue and the business world is full of stories that will make your hair stand on end. Stories of how big – and often hugely successful – organisations go belly up because of bad strategic decisions – think Blackberry and Kodak – or of how poor decision-making resulted in the loss of life, environmental and reputational damage as well as a loss of billions of dollars like the BP Deepwater Horizon oil spill or NASA’s Columbia disaster.
On the whole, strategic business decision-making failures fall into two camps: business leaders not doing what they could have (established SA banks, for example, did not capture the SA low income market, a start-up; Capitec did and is now enjoying record growth) or doing what they shouldn’t (Quaker Oats destroyed 80% of shareholder value in their purchase and handling of Snapple, for instance.)
No-one wants to be remembered as the one who made the wrong call. But the fact is that as the stakes get higher and the operating environment more unpredictable, it is increasingly difficult to make good strategic decisions. According to an article last year in the Harvard Business Review, US public companies now have a one in three chance of being delisted in the next five years – either due to bankruptcy, liquidation, M&A or for other reasons. That is six times the delisting rate of companies 40 years ago. On the JSE, 40% of the ALSI 40 have been replaced within 10 years.
Fortunately, there are a few red flags that local business leaders can watch out for in these times of increasing competitive pressures.
Too many business leaders trust their gut when it comes to making big decisions, but science shows us that intuition is only reliable when certain conditions are met. Unless a CEO or business manager has made the same or a similar decision multiple times previously and received swift feedback on how that decision turned out, and unless the decision is made in a stable, linear environment – intuition cannot be considered reliable.
Virtually all strategic business decisions do not meet these criteria and intuition should therefore not be deemed reliable. Intuition is essentially a pattern recognition capability based on past, repeat experience.
And, it is not only our intuition that we should be cautious of, it is also the predictions of experts.
Just think back to the past year. How many people predicted Hillary Clinton would win the US presidential election? And how many “experts” were certain the UK vote would not be in favour of Brexit?
In one fascinating 20-year study of 284 specialists from various fields, US Professor Phil Tetlock found that in 80 000 predictions about the future, people were only slightly more accurate than chance and worse than basic computer algorithms. He found the experts to be systematically overconfident – they thought they knew more than they knew.
Psychologist Michael Shermer in his best-selling book, The Believing Brain: From Ghosts and Gods to Politics and Conspiracies - How We Construct Beliefs and Reinforce Them as Truths, shows how people will first form a belief and then try to find the “proof” for it. Shermer argues that the brain is a belief engine that naturally looks for patterns, “connecting the dots” based on what we believe.
In a digital world with so much and such varied information, we can find “evidence” for even our craziest beliefs. Not only can we find it, but we readily accept evidence that supports our beliefs and are critical of evidence that challenges our beliefs. Interestingly, this probably contributes to the success of Fake News.
To guard against this effect, business leaders need to be careful about what they think they “know” and what may only be a belief about what consumers want or what a business or market trend could be doing in the future. The beliefs should be tested before investing.
The world is changing faster than ever before. The competitive landscape is being redefined as emerging technologies, such as robotics, sensors, and artificial intelligence enable new players to enter with disruptive business models. Geopolitics are in constant flux, both internationally and in South Africa. And who knows what customers will want next. Uncertainty is unavoidable.
But the good news is that there are powerful, proven techniques for dealing with uncertainty. For example, modelling is an effective tool that can help business leaders understand the implications of the uncertainty in their specific context.
By gathering factual knowledge about an industry or business, studying the trends of customers, competitors, regulators, etc. and making use of an array of probability tools and practices, it is possible to make fuzzy, yet meaningful predictions.
This can be a tough one for many business leaders to get to grips with – aren’t we all conditioned to expect good outcomes to mean we have done the right thing? In fact, research by Accenture in 2015 shows that seven out of 10 executives rate the quality of strategic decisions on the business outcomes achieved, but this is simply wrong as it does not consider the role of luck. Stanford Professor Ron Howard says it neatly: “You can’t tell by the outcome whether you made a good decision”.
Focusing just on outcomes undervalues the process for making strategic decisions – which is much more important. Defining and following a good process for strategic decision-making will not guarantee individual outcomes, but the probability of a good outcome for each decision is improved, and overall the outcomes of a set of decisions will be better.
Too many organisations do not see the value of a strategic decision-making process. As such, very few invest in developing and following good strategic decision-making processes and they don’t seek to learn what worked well in the past – and what did not. This means they cannot drive improvements in their strategic decision-making capability. This is a pity, because they are going to need it.
There is no doubt that most organisations both in SA and further afield will face an obstacle course of note for the foreseeable future. To minimise their chances of falling flat on their faces, those tasked with strategic decision-making would do well to firstly heed their own limitations, ensure that they surround themselves with people who think differently to them, and then invest in good processes that will help to ensure that the story of their organisation does not become another cautionary tale.
Wayne Borchardt is the convenor of the Strategic Decision Making programme at the University of Cape Town Graduate School of Business.