From drawing up strategy plans to executing operations, raising capital to planning budgets, defining products and structuring sales channels, corporate management decision-making has always been a challenging one.
Unfortunately, given the fast-paced, information age we live in, things are not going to get easier. How leaders make their decisions, and the quality of those decisions, are being disrupted. In fact, it is expected that 10 years from now, these patterns of decision-making will be completely different, though the effect will only be clear then.
The reasons are predominantly attributed to the external business environment in which companies operate. Inadvertently, it will impact the internal decision-making process. Discussions with international managers in Europe and Asia have indicated that there is a global pattern of change occurring that will yield more problems than opportunities.
For starters, managers will decide to be more risk averse; decisions will tend to be governed by a short-term horizon; individual preferences of managers will dominate company targets; and finally, the focus on customer needs will reduce. If these four challenges are not addressed, firms can expect a loss in competitiveness.
Government and compliance
There is hope yet. These external forces of change are easily identifiable and once there is acknowledgement and acceptance of them, managers should adapt their internal decision-making process and create suitable counter-measures.
One of the biggest change drivers is an expectation by society that governments solve problems, than let market forces run their course. In reaction, administrations are already taking up the gauntlet.
A good example of this is the aftermath of the Tohoku earthquake and tsunami in 2011 that led to the meltdown at three nuclear reactors in the Fukushima Daiichi Nuclear Power Plant complex. It resulted in a global loss of confidence in nuclear power both among the public and regulatory bodies.
Countries as far away as Germany and Italy reacted by immediately shutting down their nuclear reactors, while plans to build new ones were abandoned. Over in the US, the the Union of Concerned Scientists recommended “establishing a logical, systematic and coherent regulatory framework for adequate protection”. The entire nuclear industry is now governed by a stringent regulatory regime.
The implications for management is obvious. Renewed efforts and resources will need to be allocated to monitor the government’s actions and rulings, shifting the attention away from market-based solutions that cater to customers’ needs and wants.
A second force of change is compliance pressure, coupled with information technology. This does not refer solely to government regulation. Instead, it can be defined in the broader sense to include external stakeholders who put pressure on companies by legal initiatives, or by setting and communicating “ethical standards”. Examples include non-governmental organisations (NGO), social media and bloggers.
Adding to the complication is the trend that a company’s actions from the past are judged not only by the norms at the time the decision was made, but also by those of current day. The latter, in most cases, are more sensitive, rigorous and “politically correct”.
American restaurant chain Applebee is an example of a company caught on the wrong side of this fence. Compliant with corporate policy, it fired a waitress who posted on social media website Reddit the scanned copy of a customer receipt that had a nasty comment on the service she provided.
It went on to post the rationale of its corporate policy on its Facebook page, sparking a negative public reaction. Unable to cope, its social media managers resorted to standardising their responses with a cut-and-paste reply of the corporate policy statement, further infuriating the public. When the number of negative comments surpassed 20,000, Applebee had to disable user posts to its Facebook page.
With incidents like this becoming more frequent, it is no surprise that managers will decide to be risk averse in the name of self-interest, which itself has an impact on the firms they work for, as the value systems for a company is different from an individual.
Compressed timelines and technology
In 2011, IBM ran a four-page advertisement in The New York Times and The Wall Street Journal on the longevity of corporations in the US. It stated that only two of the top 25 industrial companies survived from 1900 to 1960, and only six of the top 25 Fortune 500 companies from 1960 to 2011.
Among the many reasons for this dramatic decrease in the life span of firms include mergers and acquisitions being the norm, and industries changing overnight. But they are not alone.
Even managers are seeing reduced tenures. Data from the US Bureau of Labour Statistics in 2012 showed that the average worker at a company stays for 4.4 years, but with younger workers that figure is halved. With this, it is expected that allegiances are weaker and there will be a disconnect between company targets and personal motives.
A fourth force of change is technology. Its impact is far and wide-reaching. Entire companies have risen and fallen because of this. Attention spans are reduced because of information overload. Even the quality of globalisation will be different.
Expect to see the competition divide between developed and developing economies fade – for instance the recent acquisition of European companies by Chinese corporations (a recent example being KraussMaffei Group, one of Germany's largest domestic machinery suppliers, being bought over by China National Chemical).
Other changes in globalisation, including parts of the value chain which define a specific market segment, are now much easier to copy; Industry 4.0 will allow technology to be the decisive factor when it comes to value creation for companies; and new transformative technologies such as the Internet of Things or Big Data may have a similar effect on disrupting the value chains of many industries.
Through the awareness of these forces of change that are shaping the business environment in the next decade, it is hoped that firms will be able react positively to avoid the pitfalls of managerial decision-making.
External and internal counter measures are manifold – such as developing strategies to communicate with NGOs and creating an internal culture of problem awareness –but there is no single solution. Instead, firms need to develop a specific toolbox suited to the context of the environment. Only those who successfully do so have hope for longevity.
About the authors
Dr K Ravi Kumar was the Shaw Chair Professor and Dean of Nanyang Business School, NTU.
Dr. Kay Segler is Adjunct Professor at Nanyang Business School, NTU and former Senior Vice President, Special Projects Asia, BMW AG.
This commentary was published in The Business Times on 18 May 2016.