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Archive for the month “August, 2012”

How to handle decision making in the management teams? In many companies’ management and leadership processes seem to work well, but suddenly something surprising happens. In spite of many cross-checks and meetings, things turn into a non-expected direction. All think that everything was in place … but then something emerges and business plans are outdated in a day. Why this happens?

It is typical than there are always some biases in management teams of companies. It is typical that for individuals it is not easy to make question marks on official agreements and strategies. Even though all nod in agreement and look happy it is not easy to say something critical. “It was settled” or “we all agreed” are typical notes on the memos of companies in this kind of decision situations.

Raising dissenting voice is not easy – especially when the chief boss decides something. It is much easier to be among “yes-sayers” than among “critical questioning men”. Self-fulfilling prophecy is the tendency to engage in behaviors that elicit results that will (consciously or subconsciously) confirm our beliefs. “Yes men” cause self-fulfilling prophecies. There can be also a halo effect, the tendency for a person’s positive or negative traits to “spill over” from one area of their personality to another in others’ perceptions of them.

In many case studies of management processes, some typical mistakes have been identified. First, there is tendency to devote attention only to those events seen as most likely. Secondly, once the team of decision makers had made up its mind as to what was going to happen, even conclusive information that the decision was poor did not change the prediction and associated decision. Thus there is typically a problem of groupthink in management teams. One reason for this problem is homogenous social and cultural backgrounds.

Often management teams have similar backgrounds: university degree holders, men with similar hobbies, career paths, middle-class people, and homogenous values. False consensus effect means the tendency for people to overestimate the degree to which others agree with them. Sometimes there can be anchoring decision-making biases, where there is the tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions.

Another problematic issue in management teams is overcoming overconfidence. The future looks assured for them. Their judgments are made with deep confidence. However, people may feel confident that they do know the right answer but actually don´t. They don´t know they don´t know. Other options of knowing are: (1) They do know they know; (2) they don´t know they do know and (3) they do know they don´t know. Obviously the best option would be to know that they know. In reality this option is not often available for a management team.

Third typical bias of a management team is a confirmation bias. What it means? It means that we don´t place ourselves in situations where we can test the quality of our judgment. We want to seek that information that will confirm the quality of our predictions and decisions. It is quite human character of people, wanting to be in right – winning team. In this way we are selective in our observations.

Fourth bias in management teams, is so called hindsight bias, which is connected to our readiness not learn from experiences. In general, we don´t learn from experience because experience has little to teach us. That is why our recollections of our judgmental predictions confirm these to have been accurate. Some call this bias “I-know-it-all-along-effect”. Thus, our judgments are rooted to history and it cause biases to emerge.

Fifth bias can emerge because we rely on expert predictions too much. We can call this bias as an expert bias. Also experts can cause group thinking bias and other people may suffer from this kind of bias. There are many other kinds of biases, too like randomness bias, sunk-cost bias, self-serving bias and escalation and commitment bias. Projection bias is close expert opinion bias. It is the tendency to unconsciously assume that others share the same or similar thoughts, beliefs, values, or positions.

Sixth bias, randomness bias means that there is a tendency people have to seek patterns where none exist and to invent the existence of unjustified causal relationships. It is the tendency of people to make sense out of events which are so random in nature that not enough should be read into them. Close to randomness bias is Gambler´s fallacy, the tendency to assume that individual random events are influenced by previous random events.

Seventh type of bias, sunk-cost bias is often connected to too optimistic thinking. Sunk-costs are costs that cannot be recovered once they have been incurred. Sunk-costs bias greatly affects the decisions, because humans are inherently loss aversive and thus normally act irrationally when making economic decisions.

Eight type of bias, self-serving bias occurs when people attribute their successes to internal or personal factors but attribute their failures to situational factors beyond their control. The term, “self-serving bias”, is used to describe a pattern of biased causal inference, in which praise or blame depend on whether success or failure was achieved in reality.

Ninth type bias, escalation and commitment bias means tendency to invest additional resources in an apparently losing proposition, influenced by effort, money, and time already invested. The term is also used to describe poor decision-making in business, government, information systems in general. Escalations and commitment biases are typical in software project management, in politics, and in addictive gambling. To sum up: there are 9 key sources of bias in management teams:

• Overcoming overconfidence;
• Group thinking bias;
• Confirmation bias;
• Hindsight bias;
• Expert opinion bias;
• Randomness bias;
• Sunk-cost bias;
• Self-serving bias and
• Escalation and commitment bias.

It is good to be aware of these potential decision making biases in decision making situations. We could avoid these typical biases, if we were aware of these potential biases. The lessons from history can tell us that many management teams do not identify these biases and serious management failures happen. A sad truth is that we don’t always learn from experiences. There are very many historical lessons available for decision makers but we should learn something from these old lessons. From this perspective “learning organization” is a modern myth.

There is need to question some issues (and biases) in many management teams. That why bohemian persons and “out of box” thinkers may be very valuable members in management teams. It is easy to say that we should be free of biases, but in reality we are often slaves of biases and fallacies. Only personal and critical reflections can help us to be free from these biases. Open and critical discussions in management teams should be encouraged and supported too. Daily illusions about effective control should be avoided in all the decision-making situations and processes.

Further reading

Wright, George (2001) Strategic Decision Making. A Best Practice Blueprint. John Chichester: Wiley & Sons.
Goup 3: Bhavesh, Brunica, Deepak, Kane, Kiran, Lisette & Monica (2012) Biases in Decision-making. Web: http://www.scribd.com/doc/21613064/Biases-in-decision-making
Scribd, “gaea_myzticmoon” (2012) Biases. Web: http://www.scribd.com/doc/73002909/Biases

Hypercompetition and Hybrid Economy: How to Save Capitalism?

Financial Times Lexicon defines hypercompetition in a following way: ”A situation in which there is a lot of very strong competition between companies, markets are changing very quickly, and it is easy to enter a new market, so that it is not possible for one company to keep a competitive advantage for a long time”. (See http://lexicon.ft.com/Term?term=hypercompetition). Many economists have noted that hypercompetition leads markets to unstable conditions. Theories of general equilibrium in markets and automatic stabilization of markets do not hold, if markets are in unstable conditions. Richard A. D’aveni introduced this concept to scientific discussion of company and corporate theories. His book “Hypercompetition” is a classic book in the international management literature. One key statement of his book was that competitive advantage can no longer be sustained.

Hypercompetition results from the dynamics of strategic maneuvering amongst many competitors. It is the condition of rapid escalation of competition based on price-quality positioning.

Corporations and companies want to use other tools to compete under conditions of hypercompetition. They do not want to start price wars. In such conditions corporations want to be Cost & Quality (C-Q)-leaders or followers. They may want to create Timing and Know-How (T-K)-Value chains and build new efficiencies. In some case they may rely on Strongholds (S)-Core or on Distinctive Competencies. Deep pockets strategy is based on the availability of financial capital. (see http://blogs.msdn.com/b/archetype/archive/2006/07/24/677222.aspx).

To escape disastrous price wars, modern companies try to occupy different locations on the price like brand strategies, offering mass customization, quality axis, using micro-marketing, and shifting strategies based on the changing anatomy of industry trends.

To sum up, new arenas of hypercompetition are:

  • Cost & Quality (C-Q),
  • Timing and Know-How (T-K),
  • Strongholds (S), and
  • Deep pockets (D).

Hypercompetition is emphasized on several occasions – in particular, in the creative economy in the context of organizational development. Success is based on the fast changes in hypercompetitive business environment. Agents and leaders must change rapidly and understand and internalize weak signals in their decision environment. For a company to stay alive and competitive it must very innovative. It mean that a company delivers novel and advanced products and services for which there is little or no equal in the marketplace. Commodity differentiation and branding are key aspects of hypercompetition.  Hypercompetition is focused on is new ideas, inventions and innovations.

Now many experts have started discuss about hybrid economy. What is hybrid economy? How it is connected to hypercompetition? A hybrid economy is any type of local, state, or national economic system that involves a more or less equal focus on two or more different types of economy.

This hybrid economy model is a relatively common structure that has been utilized in many different settings over the history of humankind. For example, in traditional agricultural society there were exchange and storage economies. Some examples of a hybrid economy may include a creative economy, a military-industrial based economy, a university-industry based economy, or hybrid economy based primarily on a mix of business and government. Thus, there are various forms of hybrid economy. New forms of hybrid economy include typically e-business and internet economics.

These forms of hybrid economies are not fitting well to pure exchange mechanisms of market economy. The reason for the existence of hybrid economies is that they promote stable systemic mechanisms than market economy or unstable hypercompetition.  The element of public good is typical for hybrid economies. We can even claim that in the future we need more elements of hybrid economies to make capitalism work better. If we want that capitalism delivers benefits and positive values to everyone, there is need to develop more innovative patterns for the hybrid economy. New forms of hybrid economy can also include dynamic elements of social innovation.

The transition to a hybrid model of competition does not mean that the market would disappear, and markets would not be relevant for transaction mechanisms. This is something that should be emphasized. Also hybrid economy is based on competition. Hybrid competition is a very important new element in the global hypercompetition. Hybrid competition is also connected to good governance systems and to trust of democratic agencies and institutions.

We can take a number of reasons why the hybrid competition has risen and continues to rise as an important part of people´s and organizations´ wealth creation processes:

• Globalisation and its associated cultural interactions;

• The penetration of the Internet and related digital networking;

• Digital technology innovations (Web 2.0, Web 3.0 and Web 4.0 etc.);

• Pressures and unstable processes of  the hypercompetition;

• Ubiquitous r/evolution, the Internet of Things and other digital forms of evolution like Cloud Computing and Big Data), and

• Co-creation (co-creation processes) with the growing economic importance.

The global economy means a new division of labor in the world. Workplaces are lost in some countries and regions and in some other places people are creating new jobs.

Frequently asked question is what kind of new work places can be created after old work places are lost? One obvious answer is: “Something else”. People have always developed something else after the loss of permanent jobs. The big problem is that it may take too much time to find new jobs, if we do not make systemic changes to the postmodern societies.

If we rely only on the hypercompetition and market mechanism, our societies will be very unstable and cause a lot of social losses. If we really can develop new social innovations and new forms of hybrid economy, we can expect that social and economic transition processes will be faster, less unstable and cause less welfare losses.

Today we must allow multiple stakeholders to negotiate over how to attain a desirable future. Developing new innovative forms of hybrid economy will require new forms of dialogue and debates. The only option is not unstable hypercompetition, which mostly delivers benefits of exchange and markets unethically and unequally.

It is worth of underlining that people create their economies and systems of governance. It is worth of noting that in capitalism people are allowed to think freely. These two things are relevant if we want to save capitalism and re-invent it as a dynamic form of global governance.

Further reading:

Anderson, Theresa Dirndorfer (2011) Beyond eureka moments: supporting the invisible work of creativity and innovation. Information Research. Vol. 16, No. 1., Web; http://informationr.net/ir/16-1/paper471.html

D’aveni, Richard A. (1994)  Hypercompetition. Managing the Dynamics of Strategic Maneuvering.  Web: http://books.simonandschuster.com/Hypercompetition/Richard-A-D’aveni/9780029069387

Florida, E. (2001). The Rise of the Creative Class. New York, NY: Basic Books.

Howkins, J. (2001) The Creative Economy. London: Penguin Books.

Howkins, J. (2009) Creative Ecologies. Where Thinking is a Proper Job. St Lucia, Queemsland: Queensland University.

Lessig, Lawrence (2008) Making Art and Commerce Thrive in the Hybrid Economy. London: The Penguin Press.

Palmer, Tom G. (Ed.) (2012) The Morality of Capitalism: What Your Professors Won’t Tell You. Ottawa, Illinois: Students For Liberty & Atlas Network Jameson Books, Inc.

Wolff, Richard D. & Barsamian, David (2012) Occupy the Economy. Challenging Capitalism. Chicago: Haymarket Books.

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