There are a number of pitfalls connected to decision-making. Many of the
‘traps’ we describe can also be used consciously in attempting to influ-ence the decisions of others, for example in negotiating. The very best defence against these hazards is to be aware of them.
The anchoring trap
We tend to ‘anchor’ our thinking and give disproportionate importance to the first piece of information that crosses our path. If the magnitude
of something is hinted at in a discussion, it will tend to dominate what follows. This can be exploited in negotiations, for example.
The status quo trap
This refers to our tendency to want to keep things as they are. In busi-ness, to deviate from the status quo involves taking responsibility upon oneself and thus risk criticism. This hazard is one to watch out for in repres-sive environments.
The sunk cost trap
The sunk cost trap is related to our desire to be consistent and follow deci-sions we have previously made. This can often be observed in business.
Products are pushed for far too long in the hope that their prospects will improve. It goes against the grain to have to admit that a product has been a bad investment and abandon it.
The confirming evidence trap
We tend to seek proof that supports our viewpoint or the decision that we have taken intuitively. This can certainly be observed in politics, when two political opponents with the same information find arguments to support their own orientation.
The framing trap
The framing trap is a hazard that we may meet through the way a problem is framed or presented. The way a problem is presented considerably influ-ences the alternatives we choose. It has been shown that problems that are presented as a gain lead to lower risk-taking than problems presented as a loss.
The estimation and prediction trap
People are strongly inclined to overestimate both their own performance and their ability to foresee the future and as a result, wrong decisions are often made. The University of Michigan carried out a study where top
exec-utives in a number of companies were asked their opinions on certain matters. The following statistics emerged from the study:
• 50 per cent thought that, in respect of performance and quality, their own company was among the top 10 per cent in their industry.
• 75 per cent of managers thought that their company was in the top 25 per cent in respect of performance and quality.
• 90 per cent of managers thought that they were in the upper half of their industry.
The caution trap
Certain people find that it is always easier to be cautious and careful in their actions instead of taking risks.
The impression trap
As human beings we tend to be unduly influenced by unusual events in our immediate environment. Under these circumstances, objectivity and a sense of proportion are often abandoned. Examples of such events are aircraft accidents, illnesses around us and traffic accidents.
The only real defence against all of these traps is to be aware of them. We therefore advise readers to give a little extra thought to those ‘go – no go’
project decisions, evaluations of their company’s performance vis-à-vis the competition, and so on. It can often be a good idea to invite someone from outside the company to question its decisions and assumptions, i.e.
to play the devil’s advocate.
RECOMMENDED READING
1. John S Hammond, Ralph L Keeney and Howard Raiffa, Smart Choices: A Practical Guide to Making Better Decisions.
2. Robert B Cialdini, Influence: Science and Practice.
3. Scott Plous, The Psychology of Judgment and Decision Making.
Deregulation
Deregulation refers to industries or areas where competition was either non-existent, or strictly limited by regulation or legislation and where the limitations are eased or abolished. The classic case with which most people associate the word is the deregulation of air passenger traffic in the USA, initiated in 1978 by the Carter administration. Deregulation of telecom-munications in the United States and of banking and currency trading in Western Europe have since come to highlight a new kind of strategic situ-ation that scarcely existed before 1978. Today in many industries, countries and, not least, in the EU, we are witnessing both fear and joy in connection with the general deregulation which is proceeding at a vari-able pace – most recently from 2003 in agriculture within the EU.
To understand deregulation and the business opportunities it offers, we should first try to understand the factors that led to deregulation being imposed in the first place, and how things have changed since that happened. In the case of airline traffic, it was considerations of safety that made governments all over the world feel, after World War II, that regu-lation was necessary. The underlying idea was that unrestricted competition would tempt airlines to cut corners on safety.
What has happened since then is that safety in aviation has steadily improved and has now reached a level that would once have been almost inconceivable. Since the beginning of the 1960s, with the exception of 1985, the number of scheduled airline passengers killed in accidents has fallen steadily when measured per passenger-kilometre.
Many of the regulated monopolies were originally set up because the tech-nologies and investments involved made competition impossible.
Telecommunications were long regarded as a ’natural’ monopoly, but modern radio technology, optic fibre cables strung along railway lines, satellites and, not least, the Internet, have made the business an attrac-tive proposition for new operators. This creates problems for the former monopolists, one being how to generate a sense of success in their organ-izations. Being forced to yield market share can cause psychological and organizational upsets of an often unforeseen kind.
The disadvantages of regulation had grown more and more apparent in the light of the impressive improvement in efficiency that has taken place in private enterprise throughout the world, partly as a result of the energy crisis of the mid-1970s. It has become increasingly obvious that efficiency is decidedly poorer in regulated industries. This is of course due to the deadwood that organizations accumulate when they do not have to worry about competition.
As national economies have got deeper into trouble, the efficiency of regu-lated industries has become more and more of an embarrassment. This is probably one of the chief explanations for the wave of deregulation now mainly sweeping the Western world.
Clearly there is a risk that businesses which used to be regulated will lack the ability and will to compete in the new environment in which they find themselves. This lack of competitiveness will naturally not only apply to production, i.e. in cost per unit produced, but just as much on the other axis of efficiency, i.e. value as a function of utility and price. The ’soft’
customer utility functions on the service side are often underdeveloped.
This is natural and understandable in an environment shielded from compe-tition. Spectacular improvements in productivity can be observed in deregulated industries, clear evidence that regulation causes inefficiency due to a lack of competition.
According to all the theories, a company in a monopoly position ought to generate abnormally high profits. But such is hardly ever the case in practice, because companies that are shielded from competition let their cost levels drift upward through a surfeit of capital and costs to the point where their profits are not much better.
There are different aspects to deregulation: the deregulated business that must transform itself in a competitive culture, and the part of the indus-try formerly existing under different conditions now presented with new business opportunities. Yet a third aspect in this connection is that compa-nies might fall for fashionable solutions which can lead them into a maze, with negative consequences.
Poorly planned divisions of rail or airline companies and slipshod sepa-rations between a company’s infrastructure and opesepa-rations have, in many cases, led to teething problems that have proved expensive to correct. The
company that has been regulated must face up to a cultural revolution.
The monopolistic or, through state control, partly monopolistic airline must compete with new low-priced operators which have identified passenger demand for low prices as the decisive component in customer value. Such situations call for a complete change in an organization’s attitude to performance.
The deregulated unit generally has far too low operational productivity, i.e. too many staff. Further, the business has generally underestimated price as a means of competition. By this we mean the great importance that customers attach to price when there is a free choice between different alternatives.
A third factor is the investment structure a company has got into. As soon as it is confronted with competition it will by definition lose market share, and when this happens its boots will be too big, not only in terms of staff, but also in terms of premises, machinery and other parts of its infrastruc-ture. To give an example, a traditionally monopolistic European telecommunications operator was found to provide 26 sq. metres of office space per office employee, while the corresponding figure for Bell Canada was 14 sq. metres. For other competitors the figure was still lower. The deregulated party therefore has to go through a baptism of fire by stream-lining its operations, i.e. it must generate greater productivity and customer value.
Infra-structural sources of revenue such as the operation of rail tracks or telecom networks, or access to airport departure times, are often lost. In cases where businesses succeed in keeping control over their infrastruc-ture, they often, in a defensive strategy, milk this cash cow through high prices. This can lead to disputes with new competitors and loss of the cash cow, which is transferred directly to the state in question.
The challenge of turning a national behemoth into a lean operator in a competitive market is a monumental one. It is all too easy to sneer at organ-izations which take up the challenge and struggle in the process.
However, in our opinion they are due the greatest respect in their efforts to effect a cultural transformation that can secure a future for the company and its stakeholders.
While for some players deregulation may represent an uncertain future, for others it is often just the opposite. Suddenly, opportunities are there to create new TV channels, new airlines, new telecom operators or new energy companies.
Meanwhile, inherent in this apparently cosy scenario great dangers await the new players. One is to underestimate the formerly regulated company’s influence on society. Appearances are always against monopolists. They have very little goodwill because people hate not to have alternative suppli-ers. It is therefore common to find entrepreneurs rushing into new business opportunities, underestimating both the costs of getting into the market and the strong position of the former monopolist – not least with the author-ities. It is not unusual to see large numbers of new market entrants coming to grief in deregulated markets. This can be observed in the airline busi-ness in the USA, in telecoms, energy, and so on.
New companies underestimate the time it takes to gain acceptance for new brands and new products, also known as the modernity trap. The costs of running a business in a previously regulated area are often underesti-mated. The operational side of things may well seem uncomplicated and easy to manage at much lower costs, and lead to dramatic price reduc-tions. But unsuspected and unforeseen details may intrude upon start-up, raising costs and leading to losses and market exit. It can thus be a diffi-cult situation for the deregulated company as well as its new competitors.
The newly deregulated business undoubtedly finds the situation most diffi-cult, however. It often has to deal with a comprehensive lack of efficiency in both production and customer value, while customers’ sympathies often shift to what is perceived to be the underdog.
As the situation calls for special management competence, the benchmark-ing of other deregulation exercises is strongly recommended.
We bring this section to a close by pointing out that there are naturally cases where regulation may be necessary for, among other things, social or ethical reasons.
RECOMMENDED READING
1. Daniel Yergin med Joseph Stanislaw, The Commanding Heights:
The Battle Between Government and the Marketplace that is Remaking the Modern World.
2. William Emmons III, The Evolving Bargain: Strategic Implications of Deregulation and Privatization.
Development
Development can be described as change from a more primitive to a more sophisticated state. In a glossary of business terms, development definitely rates a place today. The term is used in two principal senses:
1. To denote one of the four basic functions of a company (the other three being marketing, production and administration).
2. To denote a method of tackling issues that gets things moving in the right direction.
The development function in a company usually devotes its effort to product development, or to concept development in the case of knowledge industries.
Agency Professional organization
Secretariat Factory
Professional skills
Business management skills Low
High
High
This is what we naturally associate with the word development. In recent times a couple of other terms have come into use which compete with the traditional use of the word development in industry. One is market devel-opment, which refers to expansion of existing clientele (served market), and the other is organization development, which refers to the development of individuals, groups, areas of responsibility, control systems, incentives and so on.
Nevertheless, by far the most important meaning of the word develop-ment is still the developdevelop-ment of goods and services in the company to satisfy customers’ underlying need structures, and thereby increase demand for one’s own product. In a modern business development process, we cannot take it for granted that development resources should be used to improve product performance. In many cases they should be devoted to other func-tions instead, ones where the greatest possible increase of customer satisfaction can be achieved, which will in turn create competitive advan-tages. In short, business development is a matter of allocating resources to where they will produce the greatest possible competitive edge in the shortest possible time.
The second sense of the term development can be most simply explained by contrasting it to dealing with problems of administration. Matters that are dealt with are matters that call attention to themselves. They arise in every kind of activity. Prices must be adjusted, employees must be recruited, budgets must be drawn up, progress reports must be analyzed, etc. Dealing with issues is the main function of administrative management, or what Joseph Schumpeter, the well-known economist, calls static efficiency.
The characteristic feature of development issues, on the other hand, is that we have to go out and look for them. That is why they must be pursued with extra energy. Strategy work is a good example of this kind of devel-opment question.
The ability to handle development issues is what largely characterizes modern management. Maximum efficiency in administering the status quo has given way to efficiency in developing one’s area of responsibility. The business development concept has come to be a characteristic of offen-sive strategies designed to make the business grow rather than to conserve its resources. Both ingredients are of course necessary to
success-ful business management. The newly discovered development aspect of business management sometimes tempts managers into flamboyancy and reckless use of resources, which of course is not a good thing.
RECOMMENDED READING
1. Jim Collins, Good to Great: Why Some Companies Make the Leap… and Others Don’t.
2. Michael Fullan, Leading in a Culture of Change.