For an experienced manager, business owner or executive, making decisions is a way of life; so much so that few seasoned professionals even think about their decision-making processes. They rely on what academics call “heuristics,” which is another way of saying “rules of thumb,” “based on experience” or even “flying by the seat of your pants.” Unfortunately, or, luckily, depending on whether you are a pessimist or optimist, few if any of us in the USA have encountered something like COVID19. COVID19 presents challenges that few people are prepared or were prepared to cope with . Let us examine two of these challenges and then see the impact it has on managerial and entrepreneurial decision making.
- Duration of the crisis: experts don’t agree on an exact date, nor what “ending the crisis” means. Some say it will never end, COVID is here to stay, even when controlled by vaccines and better cures. Others, like Bill Gates and Dr. Anthony Fauci are of the opinion that by the end of 2021 we could be close to something like normal with the disease in check and hoping for a ‘normal’ 2022. When the average restaurant or small retail business owner hears this, he or she must be reminded of something akin to John Maynard Keynes’ phrase: “In the long run we are all dead.” To this many react: “If no matter what, I/my business is not going to survive, then let’s eat, drink and be merry.” Needless to say, this “we are on the Titanic already” attitude does not optimize results nor result in clear-headed thinking.
- Depth of the crisis: From a business point of view, we are not going to enter into the death or case estimates; that is better off left to the medical and public health officials. Our concern is the impact on small businesses. To gauge that, we propose using the impact on State Revenues and therefore, Budgets. Estimates have been published since late April . (Note: Note, states dependent on oil revenue, like Oklahoma (13.9%), Texas (9.3%), Wyoming (8.9%), North Dakota (8.3%), Alaska (7.1%), and Louisiana (6.0%) have revenues suffering a double whammy. Figures refer to household income provided by the energy industry and the source is https://www.regiontrack.com/www/which-states-are-most-dependent-upon-oil-and-gas-activity/) The good news is that the Low Estimate seems to have stabilized at around 5%. The bad news is that the High Estimate has been increasing and is in the 10-15% range. However what is a thunderstorm for the State is a Level 5 Hurricane for the small business forced to close.
Figure 1- Impact of current crisis on State Revenues and Budgets, Source: https://www.ncsl.org/research/fiscal-policy/coronavirus-covid-19-state-budget-updates-and-revenue-projections637208306.aspx
A logical question for Small Business Owners is “given the degree of uncertainty around duration and severity of the crisis, what decisions should I be making and how should I be making them? The types of decisions to be made depend on the nature of the business, its specific degree of pain, whether it has high or low fixed costs, and other factors beyond the scope of a short article to illustrate. How to make decisions in this context is where we hope to be of use.Managers generally make two types of important, strategic decisions:
- Decisions in response to threats: these occur when managers are impacted by adverse events inside or outside the organization. COVID 19 is the extreme case. Most businesses are in this quadrant.
- Decisions in response to opportunities: managers respond to ways to improve organizational performance and take advantage of external circumstances. Undoubtedly some businesses, like those involved in Online Communications, Education and Services and Merchandise/Product Delivery are looking at COVID 19 as a business opportunity. This is probably a minority.
By this we don’t refer to routine and daily decision making such as “Approve the report,” “Hire the HR department’s recommended candidate,” etc. We refer to those that significantly move the P&L needle.
A review of best practices and academic writings carried out by this writer reveals some valuable ideas that may be of use to owners and managers facing decision making in these times.
Most businesses are now facing circumstances never faced before: crises of uncertain depth and duration. These lead to what is called Unprogrammed Decisions, decisions that have to be made on the spot, without all the information needed and generally without a precedent to guide or illustrate the process. Experience and common sense indicate that in these circumstances even a gleam of more information can make a significant difference in the quality of the decision and the decision maker’s comfort level. Therefore, in these cases, “stall for time” is the best option, as long as that time is used to gain more information, seek others’ opinions, obtain expert advice and other tactics that improve the quality of the decision.When “stall for time” is not an option, and for many Unprogrammed Decisions, it is not, there are other ‘heuristics’ that may be useful:
- Be risk averse: go for the safest option. Not the one that maximizes revenues or gains, but the one that minimizes losses. In these circumstances avoiding losses is the key factor.
- A second strategy is to try to separate one decision into many : Instead of how many should I fire, first define according to the severity of the crisis, how many people you can afford to keep on. Even better, before looking at it in terms of headcount, calculate the amount of payroll available and then see what different combinations of temporary furloughs, salary cuts, or outright dismissals fill the required slots. This may turn one High Risk decision into a series of decisions each carrying less risk and therefore worry. [Fig 2]
Figure 2- Converting High risk decisions into a series of lower risk ones
This leads to a third strategy, Scenario Planning. This is when, in the face of uncertainty like today, different Best to Worst case scenarios are defined, laid out and then used as a reference in decision making. While Unprogrammed Decision scenarios don’t allow you the luxury of a long time to collect information and evolve thinking, an hour developing different scenarios is generally an affordable luxury and one that will surely pay off in making much better decisions. When linked to “2 ” above, it may truly be beneficial.
In times like this “Rational” Decision making, where information and time to make decisions are available, may not always be an alternative. The two other options are “Satisficing”- which is the decision method which arrives at the answer recognizing that, although it is not perfect, it meets the most criteria for success. A second one is the “Political” method of decision making. This refers to selecting the decision that annoys, angers or otherwise adversely affects the smallest number of people, or at least, the least influential ones. These are offered as alternatives to turn to in times of crisis and when the time and information for a Rational Decision making approach are not available.
There are a few other heuristics that may be of use in avoiding bad decision making:
- Don’t be influenced by initial impressions- “Cognitive Bias” or “Shoot From the Hip.” Each situation deserves at least a minimum of attention to get information and details. This can also be caused by an overconfidence in one’s ability to make good decisions immediately.
- Be sure that you are framing the problem correctly. Like the previous example, the issue may not be headcount, but weekly payouts.
- Don’t make a bad decision as a way of justifying past decisions. Choosing ‘A’ for question One doesn’t mean that is the answer for question Two.
- Avoid emotions whenever possible and the risk of just “seeing what you want to see.” When money is at stake, emotions don’t add value.
Obviously, we cannot guarantee that all or any of the tips offered here will work in every case. Experience shows that good managers and business owners that follow these tips make better decisions overall and their businesses do better. We hope they lead you down that route.Check out C2CB.co if you need a clarifying, no-obligation discussion or some pro-bono consulting help about how to get this done.