The business world is littered with examples of spectacularly ill-judged decisions. From Time Warner’s £100 billion merger with AOL to Gerald Ratner’s self-immolation by publicly rubbishing his firm’s jewelry, they make can make us laugh, shudder, or think, “There, but for the grace of God, go I.”
Are there any rules business leaders can follow to avoid being engulfed in flames by forces inside and outside their organization? Can the ability to recognize and react to evidence, without fear or paralysis, be embedded into an organization’s culture, and even its IT systems?
University of Oxford’s Said Business School published research in 2015 asking 152 CEOs how they manage doubt and make decisions. The report identified four pitfalls that can trip up any business leader and suggests ways to avoid them.
Pitfall 1: Low knowledge/no fear – hubris
The outlook looked bright for Kodak in the late 1970s when it enjoyed 90% of the film market and produced 85% of the cameras sold in the U.S. So bright that executives elected to ignore its own R&D team’s invention of the digital camera in 1974.
Fearing the camera’s release would erode its existing revenue, Kodak surrendered the chance to develop the product and lead the market. By the time customers began demanding digital cameras in the late 1990s, it was too late, and more agile, forward-thinking rivals had cornered the market.
On the other end, a U.S. airfare prediction firm leveraged predictive analytics to mine its archive of itineraries. The company correlated past trends with current fares in order to offer customers the lowest possible price 95% of the time. Machine learning can also predict what customers are most likely to buy – and when – based on previous behaviour.
The best leaders never fully relax. They never assume they know everything, and they have a thirst for data that can uncover new strategies. Techniques to overcome hubris include scenario planning, worst-case scenarios, long-term planning, contingency planning, and more.
Pitfall 2: High knowledge/high anxiety – angst
Leaders may have deep-seated fears that prevent them from taking the correct – or indeed any – form of action. The only way to cut through the angst is to seek validation. That could come from internal colleagues, trusted sounding boards inside or outside the business, or perhaps competitor analysis.
IT systems can support this validation. Unlike business intelligence tools that rely on human input to infer cause and effect, predictive analytics uses machine learning that teaches the computer to look at a particular outcome and then uncover the factors behind it (which could include thousands of possible causes and nonlinear relationships).
The result is far more accurate predictive outcomes that can improve over time. A leading German car manufacturer is using predictive analytics in this way on the factory floor. It is processing 30,000 data points per second from up to 100 engine components to predict engine failure as early as possible, thus minimizing lost hours and resources.
Pitfall 3: Low knowledge/high anxiety – paralysis
Sometimes a decision has to be made, but the person charged with making it simply can’t. Until the 2007-08 financial crisis, Detroit’s Big Three carmakers hadn’t been able to deal with a fundamental flaw in their business models. They couldn’t pay to renegotiate contracts with underperforming dealerships, therefore inadvertently rewarding poor performance, at the same time as they were churning out gas-guzzlers that consumers increasingly didn’t want.
When the crash happened, their failure to address underlying weaknesses in their business model forced them to take billions in government bailouts.
The remedy is similar to how to deal with angst. Equip yourself with the tools to understand the problem, but also be prepared to make a decision.
Pitfall 4: High knowledge/no fear – myopia
This pitfall happens when a market leader recognizes a change in the industry, but acts too late. A nascent Netflix approached Blockbuster and offered a controlling stake in its Internet startup business. Blockbuster didn’t see the new age coming and stuck with charging rental fees via its network of stores.
It is vital for a business to have people with powerful enough voices to say that a mistake is being made. Equally important the ability to recognize and react to changes.
Algorithms are at their most powerful when used to automate decision-making between two or more business processes (requiring no human input at all). In manufacturing, where networked factory floors are being further integrated into the supply chain, the adoption rate of predictive analytics is expected to expand rapidly. By digitizing analysis and decision making, businesses are responding to situations in real time and achieving groundbreaking efficiencies.
Futurist Daniel Burrus tells an anecdote from an IBM executive who told him that 40% of the company’s revenue comes from products and services that were impossible just two years earlier. This ability to recognize opportunity and be nimble enough to react is the most important skill a leader and a business can possess.
As the digital revolution delivers real-time insight and the ability to reimagine a business, intelligent cloud ERP such as SAP S/4HANA Cloud can help avoid poor decision-making.