Each year, many companies collapse under the weight of bad strategies and unforeseen circumstances.
Business decisions are never made under perfect conditions. We never have access to all the relevant information. And it is impossible to weigh each and every risk with complete accuracy.
It is possible, however, for managers to make better decisions and mitigate risk, by using tools and insights gleaned from research in the fields of economics, management, and psychology.
Below you will find a roundup of highlights from recent IESE faculty research into risk management.
Today’s executives are operating in a fast-changing, global economic landscape.
Indeed, the U.S. military term used to describe conflict zones can equally be applied to our current business environment: VUCA (Volatile, Uncertain, Complex, and Ambiguous).
Firms are constantly exposed to risks. Miguel A. Ariño, Professor of Managerial Decisions Sciences at IESE, notes that some risks are avoidable with careful attention. Others are strategic, such as misjudging the potential profitability of an endeavor. And then there are the external risks — natural disasters or terrorist attacks — which are beyond manager’s control.
In emergencies, the first thing leaders must accept is that some of their decisions will be wrong.
Or, as Ariño and IESE colleague Pablo Maella point out, decisions can sometimes have negative results, without being “wrong at the time.”
The key, they say, is to look at the various outcomes of decisions as learning experiences. Analyze them honestly and rigorously, they say, and you can improve your overall track record.
Facing up to Risk
While some decision-makers are paralyzed by risk, others simply ignore it.
But risks must be addressed and managed because, as Ariño points out: “Without risk management, the likelihood of being exposed to a serious problem over the next few months is quite small, but the probability of having a serious problem over the next 10 years is very high.”
It’s imperative, says Ariño, to face up to risk and to have a plan.
Of course, leaders are recognized for achieving objectives, not for avoiding negative — or even disastrous outcomes.
So what to do when your organization is looking to you for visionary leadership.
Uncertain environments call for specific skills, says Visiting Professor Fred Krawchuk, a thought leader in managing people in organizations.
Managers must define their aims, make sure they have the right teams in place, set priorities, have a “flat network” that speeds up information sharing, and encourage trust and transparency.
While leaders need an overarching mission, Krawchuk argues that flexibility is crucial to reaching that mission.
Broadening Your Own Perspective to Make Better Decisions
Rhetorical skills are nice in theory, but Ariño and Maella warn that in risky circumstances, leaders must avoid “sophism” — resist the temptation, in other words, to construct plausible-sounding arguments for ideas or policies that lack a true basis.
Leaders should watch for this kind of “self-delusion”, they argue, and look to deep self-analysis in order to identify the “politics” behind each decision.
Getting out of the “cocoon” of your own firm to interact with experts and colleagues from other industries, says Ariño, can help you broaden your perspective and improve your dexterity in decision-making.
So much for decision analysis, but what about implementing decisions?
Here too Ariño and Maella advocate broadening perspectives.
It’s always preferable to educate your team upfront; bring them onboard and be sure to temper language and tone so that individual team members feel their concerns are taken into account and empowered to contribute fully. Key to this is ensuring your people fully grasp the benefits to them, to the team, and to the business, that successful implementation brings.
To help you acquire decision-making frameworks and hone your strategic leadership skills, IESE offers a broad and top–ranked portfolio of executive education programs in multiple languages and in different regions around the world. Browse our portfolio today to precision-match the leadership program to your specific needs.
Tools to Help You Make Decisions
Rafael de Santiago, professor and department chair of managerial decision sciences at IESE, advocates making “decision trees” to diagram the sequence of events that would unfold in reaction to various choices you could make as you pursue a business opportunity.
Mapping out possible outcomes in this way helps you understand the nature of the risks involved — as well as potential impact of those risks on your final decisions.
The decision tree should include your options as well as “event nodes,” or outcomes you can’t control.
Computing the expected values of each course of action can help you work backwards to modify decisions and also make sure that worst-case outcomes would not put you out of business.
Another powerful tool is awareness of your own personal biases.
A well-documented concept here is the so-called “anchoring effect.” This is the tendency to stick to an initial commitment — to have a “commitment bias” so to speak — which can lead you to “double down” on the losses incurred by a bad decision, instead of cutting and running when the time is right.
De Santiago suggests fighting against these biases by planning an exit strategy at the start of any new venture.
Think upfront, he says, about how you could halt ineffective programs quickly and efficient – and avoid having to make decisions on the spot.
Other tips include coming up with number ranges to describe future potential losses or gains in order to avoid false precision. And asking peers and managers from different departments to review your projections. He also recommends taking some time to analyze and identify the particular biases that led to past mistakes.
Plan, Question, Act
Ariño adds “scenario planning” to the tool box.
This involves picking the top two variables informing a decision and really analyzing a total of four possible outcomes and their repercussion.
He also suggests playing “Devil’s Advocate,” by really questioning all the suppositions underlying your decisions, and trying to account for as many external risks (such as a rise in the cost of energy) that you can.
This helps to neutralize them, mitigate their impact, and possibly even turn them into an opportunity.
And this is the very paradox that leaders must embrace in uncertain environments.
You have to continuously search for opportunities, while at the same time be clear-eyed about the risks that lurk beside them.
Mastering the art of good decision-making will enable you to be both bold and cautious in your leadership. And help drive your company — and your career — to new levels of success
Ariño, M.A. “Are Companies Taking Unnecessary Risks?” IESE Alumni Magazine 137, April-June 2015.
Ariño, M.A. “Decisions, Decisions.” IESE Insight Review Issue 7, Fourth Quarter 2010.
Ariño, M.A. “Learn From Your Mistakes.” IESE Insight Review Issue 26, Third Quarter 2015.
Ariño, M.A. and P. Maella. “Right Decisions Do Not Always Guarantee Success.” IESE Insight Business Knowledge Portal, 2011.
De Santiago, R. “Decision Tools to Keep You on the Right Path.” IESE Insight Review Issue 19, Fourth Quarter 2013.
Krawchuk, F. “Stepping Up to Uncertainty.” IESE Blog Network. Posted on December 2, 2015.
This post is also available in: Spanish