I’ve thought long and hard about the nature of business, why almost all businesses end up failing and whether there is a way to continue almost forever. Forever is obviously a long time indeed! So, with that in mind let’s look at what’s going on and what we can learn.
Why do Businesses Fail
If you have the time to research this topic you will find dozens and dozens of reasons why businesses fail. Do a quick search in your browser and you will find some suggestion.
Ultimately though all these failures have one thing in common, the leadership had made decisions which lead to their own extinction. I’d like to add, there are times when circumstances were not of their making and they failed due to something outside their control. But in the main these situations are unusual.
Here’s my bulleted list.
- Run out of Cash or poor Cash-Flow
- Failure to understand your market and customers
- Failure to understand basic accounting principles
- You don’t have the skills to manage your business
- Opening a business in an industry that isn’t profitable
- Unable to build a winning team
- Failure to understand and communicate what you are selling
- Overdependence on a single customer
- Poor systems, processes, and lack of documentation
- You don’t have the skills to manage your business
- You are failing to attract paying customers in a cost-effective way
- Saying yes to everything and not understanding when to say no
- Insufficient profitability
- Business model fails to address the true demands of your market and customers
- Poor planning
- Unable to build a winning team
- No vision about where the business wants to get to
None of us like to think we are poor decision makers and yet, all the above reasons can be broken down into the category of wrong-headed thinking or of being unaware of our own deficiencies.
In other words, we don’t know what we don’t know
If we don’t know what we don’t know, how on earth are we going to find a way forward which gives us enough clarity to proceed?
Decision Making Process - Part of The Brain as in My Brain and Your Brain is Faulty!
Emotion, pattern recognition and the unconscious thought. Whenever we decide our brain has a kind of choice, it uses either system 1 or system 2. Daniel Kahneman wrote about this in a book, Thinking Fast and Slow.
System 1 is fast and automatic and does most of the heavy lifting. System 1 looks after us and can-do things like;
- Detect that one object is more distant than another.
- Orient to the source of a sudden sound.
- Complete the phrase “bread and …”
- Make a “disgust face” when shown a horrible picture.
- Detect hostility in a voice.
- Answer to 2 + 2 = ?
- Read words on large billboards.
- Drive a car on an empty road.
- Find a strong move in chess (if you are a chess master).
- Understand simple sentences.
- Recognize that a “meek and tidy soul with a passion for detail” resembles an occupational stereotype.
System 2 will help in these scenarios
- Brace for the starter gun in a race.
- Focus attention on the clowns in the circus.
- Focus on the voice of one person in a crowded and noisy room.
- Look for a woman with white hair.
- Search memory to identify a surprising sound.
- Maintain a faster walking speed than is natural for you.
- Monitor the appropriateness of your behaviour in a social situation.
- Count the occurrences of the letter a in a page of text.
- Tell someone your phone number.
- Park in a narrow space
- Compare two washing machines for overall value.
- Fill out a tax form.
- Check the validity of a complex logical argument.
One point worth making is that system 1 and system 2 work together. According to Kahneman.
“Systems 1 and 2 are both active whenever we are awake. System 1 runs automatically, and System 2 is normally in a comfortable low-effort mode, in which only a fraction of its capacity is engaged. System 1 continuously generates suggestions for System 2: impressions, intuitions, intentions, and feelings. If endorsed by System 2, impressions and intuitions turn into beliefs, and impulses turn into voluntary actions. When all goes smoothly, which is most of the time, System 2 adopts the suggestions of System 1 with little or no modification. You generally believe your impressions and act on your desires, and that is fine—usually. System 1 is unconscious, which is why it’s normally so brilliant. We don’t need to engage system 2 at all which saves us time and energy.
When System 1 runs into difficulty, it calls on System 2 to support more detailed and specific processing that may solve the problem of the moment. System 2 is mobilized when a question arises for which System 1 does not offer an answer".
If you have the time to read, Thinking Fast and Slow, I believe you will learn from it. I warn you now though, it’s quite a long book and is not going to be a quick read.
The Biggest Challenge in Decision Making
If you accept the premise of having two key decision-making systems with most falling under the automatic system 1 part of the brain. How can we ensure we make more of the better decisions and less of the poor decisions?
After all, unconscious thought is automatic, and we have already drawn a conclusion which won’t be questioned because there isn’t an executive living in our brains to say… halt, wait a second!
“Raising the Red Flag
In analysing how it is that good leaders made bad judgments, we found they were affected in all cases by three factors that either distorted their emotional tags or encouraged them to see a false pattern. We call these factors “red flag conditions.”
The first and most familiar red flag condition, the presence of inappropriate self-interest, typically biases the emotional importance we place on information, which in turn makes us readier to perceive the patterns we want to see. Research has shown that even well-intentioned professionals, such as doctors and auditors, are unable to prevent self-interest from biasing their judgments of which medicine to prescribe or opinion to give during an audit.
The second, somewhat less familiar condition is the presence of distorting attachments. We can become attached to people, places, and things, and these bonds can affect the judgments we form about both the situation we face and the appropriate actions to take. The reluctance executives often feel to sell a unit they’ve worked in nicely captures the power of inappropriate attachments.
The final red flag condition is the presence of misleading memories. These are memories that seem relevant and comparable to the current situation but lead our thinking down the wrong path. They can cause us to overlook or undervalue some important differentiating factors, as Matthew Broderick did when he gave too little thought to the implications of a hurricane hitting a city below sea level. The chance of being misled by memories is intensified by any emotional tags we have attached to the experience. If our decisions in the previous similar experience worked well, we’ll be more likely to overlook key differences”.
Given the way the brain works, we can’t rely on leaders (that’s you and me) to spot and safeguard against their own errors in judgment.
In summary, the red flags are.
- Emotional Tags and False Patterns
- Inappropriate self-interest and biases
- Distorting attachments – people, places, and things
- Misleading memories – lead us to compare one situation with another incorrectly
What on Earth are we Going to Do?
With these biases in place and the natural automatic tendency for the brain to use system 1 when it could and should use system 2, what are we to do?
Some leaders, perhaps you are one, implicitly understand their own biases and will find ways to check their decisions.
According to hbr.org which you can find in the link above, this is what’s suggested
Lay out the range of options. It’s never possible to list them all. But it’s normally helpful to note the extremes. These provide boundaries for the decision.
List the main decision makers. Who is going to be influential in making the judgment calls and the final choice? There may be only one or two people involved. But there could also be 10 or more.
Choose one decision maker to focus on. It’s usually best to start with the most influential person. Then identify red flag conditions that might distort that individual’s thinking.
Check for inappropriate self-interest or distorting attachments. Is any option likely to be particularly attractive or unattractive to the decision maker because of personal interests or attachments to people, places, or things? Do any of these interests or attachments conflict with the objectives of the main stakeholders?
Check for misleading memories. What are the uncertainties in this decision? For each area of uncertainty, consider whether the decision maker might draw on potentially misleading memories. Think about past experiences that could mislead, especially ones with strong emotional associations. Think also about previous judgments that could now be unsound, given the current situation.
Repeat the analysis with the next most influential person. In a complex case, it may be necessary to consider many more people, and the process may bring to light a long list of possible red flags.
Review the list of red flags you have identified and determine whether the brain’s normally efficient pattern-recognition and emotional-tagging processes might be biased in favour of or against some options. If so, put one or more safeguards in place
It may seem obvious but, if a decision’s been made, implemented and ends up being a bad decision, it’s worth analysing the rationale or thought process which led to it. This is one way to learn from any errors.
Another way to reduce bad decisions is to utilise your team and ask them to look at your rationale.
Now we understand how our brain works we could anticipate the situation and circumstances where error of judgment is likely to occur. Armed with this knowledge we can then do something about it.
We are all capable of making poor decisions and good decisions, the trick is to build safety devices to reduce red flags.
I’m sure you’ve lived through the good and bad decisions of others and probably have looked on with askance at some crazy things done.
Be ready to ask others to challenge you, be aware and guard against group think and if you don’t have people in your team who are able to challenge you, get a consultant or advisor to help.
Please leave your comments below.