How Leaders Can Overcome their Biases to Succeed in the Post-Crisis World

By Nikolaus Obwegeser, Noemie Tentillier, and Tomoko Yokoi

Research has shown that our ability to deal with a crisis is heavily dependent on our perception of the crisis and consequently, our reaction to it. More than ever, business leaders need to manage their cognitive biases to ensure sound decision making and future competitiveness.

With the COVID-19 crisis holding the world in a tight grip, many executives are struggling with the impact it may have on their organizations. On top of the direct impacts to businesses, leaders suffer from several cognitive biases that could impede their ability to make sound decisions.[1] We show how two common and impactful biases – avoidance and short-term focus – can be overcome with the help of a simple technique.

Perceptions Influence The Ability To React

Two factors influence how leaders perceive crises.

First, the perceived duration of the crisis frames expectations regarding the short-term or long-term effects. Humans have a tendency to reduce their attention to short-term aspects, especially during times of ambiguity and increased uncertainty.[2] This well-studied bias is called hyperbolic discounting, and it influences many aspects of our private and professional lives.[3] In the business world, this bias often induces a “survival mode” in which firms make radical cuts to strategic or innovation programs in favor of operational priorities. Smaller and immediate rewards are often prioritized over potentially bigger, but delayed rewards.

Second, the perceived ability to control the consequences of a crisis results in either a passive or active response mode. Psychologists have long found that humans employ two basic modes of dealing with stress and/or trauma that challenges their goals: approach and avoidance.[4] The approach mode describes active engagement with the problematic situation at hand, eventually leading to disentanglement and relief. The avoidance mode is characterized as withdrawal from the situation that causes stress, or “running away from a problem.” In a global crisis, leaders may find it difficult to navigate appropriately without getting lost in conflicting information or information overload.[5] While this may make it appealing to withdraw and “wait it out”, it is important for business leaders to actively engage what they can control.

Mapping the effects of COVID-19

To avoid biased decision making, business leaders should start by mapping out possible short- and long-term effects of the COVID-19 crisis, and evaluate which of those effects can be controlled through management decision making. Executives can use the following four questions to guide this process.

1.   What immediate short-term effects are beyond executives’ power of control?

Uncontrollable short-term effects of the crisis are largely related to restrictive social distancing and isolation measures put in place to contain the spread of the virus and “flatten the curve.” Most countries affected by COVID-19 have limited face-to-face business interactions with essential services (like grocery stores), while other “non-essential” businesses have had to close their physical presence. [6] This has triggered large financial problems for many firms, leading to losses of income, supply-chain disruptions and market shocks due to the ongoing uncertainty. A health crisis turned into an economic crisis as a result. The decisions that led to this situation are largely beyond executives’ control. The effects of these decisions may seem so impactful that some business leaders have resorted to desperation, “avoidance mode” and withdrawal. For example, many restaurants and retail stores have temporarily shut down, placed their workforce on leave or even fired employees, in the hope that the nightmare will soon be over.

2.  Which short-term consequences are controllable, and how?

Yet, a lot of these short-term effects are in fact controllable and there are often other options than just waiting for better times. For many restaurants and retail stores, shifting towards e-commerce and home-delivery helped to keep the cashflow alive. Other organizations were even more creative and acted quickly on their feet to turn the crisis’ short-term effects into opportunities. China’s Huanxi Media Group quickly partnered with ByteDance, the company behind the popular TikTok app, to release their long-planned New Year blockbuster “Lost in Russia” as a streaming alternative for millions of Chinese people who could no longer attend movie theaters.[7] Whether defensive or offensive, executives need to shift towards active response mode to overcome this crisis.[8] A recent report identified a set of five viable short-term responses, ranging from workforce protection, supply chain stabilization, customer engagement, financial stress testing and nerve-center integration.[9]

3. What effects will the crisis have on the long-term business environment?

At the same time as ensuring short-term survival, executives need to think about the future of their business. While the level of uncertainty about the long-term effects of COVID-19 is still very high, it decreases the more we learn about the disease and the associated policy implications. Looking back to past crises, such as 9/11 or the SARS outbreak of 2003, it’s difficult to distinguish between a crisis’ temporary effects and its permanent impact on business and society. Some effects, such as the restriction of carrying liquids on planes after 9/11, remain in place, while other restrictions have been eased with time. Businesses are better prepared to reduce these uncertainties if they leverage the unprecedented access to real-time data and computing power we have available today. Researchers and consultants are already collecting and analyzing masses of data to compute the different outcomes of the crisis, substantially improving our ability to understand the future of different industries, geographies and product/service ecosystems.[10],[11] Executives need to continuously engage with and study probable future scenarios of a post-crisis world as it applies to their business context, taking into account all available insights from inside and outside their firms. [12]

4. What actions can leaders take today to remain competitive under different future scenarios?

Having mapped out a set of likely long-term developments, it then becomes imperative for firms to utilize their scenario planning to ensure future competitiveness. [13] Business leaders need to assess what implications this has in the specific context of their firm – and which actions are necessary to protect against future challenges and reap promising opportunities. For example, organizations can leverage new digital capabilities and infrastructure that helped them through the crisis for new product innovation or workplace digitalization, including extended work-from-home policies. Verizon’s recently announced acquisition of the videoconferencing platform BlueJeans Network is an example of such forward thinking.[14] Crisis research reveals that active response modes are activated when problems are perceived as permanent and controllable.[15] The sooner executives understand the permanent changes that remain after crises, the sooner they can prepare appropriate actions to safeguard their organization’s competitive survival and leadership.

Answering these questions provides a drawing board for short- and long-term business planning during crises. The table below provides an overview of the thinking process.

Table 1: Mapping the effects of the COVID-19 crisis on the business world

Necessity is the mother of continuous improvement

Mapping the crisis into smaller chunks and clearly identifying what can be controlled is a first step to getting back into the driver’s seat. But that’s not all. Executives need to continuously check their activities and decisions against rapidly changing realities that emerge as the crisis progresses. Some scenarios will become less likely, while others will become more realistic. As Dwight D. Eisenhower once said, “plans are nothing; planning is everything.”.

In crisis mode, decisions made the day before or even hours ago may have to be adapted in the face of new circumstances. Dynamic mapping can help executives create a complete and sound basis for the decision making that captures the current situation and potential future scenarios without falling into the traps of avoidance or short-term focus.

About the Authors

Nikolaus Obwegeser is a Research Fellow at the International Institute for Management Development (IMD) focusing on digital transformation, innovation, and strategy. He holds a PhD from WU Vienna (Austria) and was Associate Professor at Aarhus University (Denmark) before joining IMD. Next to his research activities, Nikolaus provides advisory and consulting services on digital transformation.

Tomoko Yokoi is a Researcher at the Global Center for Digital Business Transformation at the International Institute for Management Development (IMD). With 20 years in leadership positions in industrial B2B, enterprise software, and education, Tomoko brings a practitioner-based approach to her work focused on developing strategic insights, value frameworks, and guidance to companies undergoing digital transformations.

Noemie Tentillier is a neuroscientist and independent behavioural researcher. She holds a PhD in Biomedicine from Aarhus University (Denmark) and worked both in academic as well as industrial research institutions. Her current research focus is on neurodegenerative diseases, in particular Parkinson’s Disease and ALS.

Reference

[1] Davenport, T. (2020). How to Make Better Decisions About Coronavirus. https://sloanreview.mit.edu/article/how-to-make-better-decisions-about-coronavirus/

[2] Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. The quarterly journal of economics, 643-669.

[3] Ainslie, G., & Haslam, N. (1992). Hyperbolic discounting.

[4] Roth, S., & Cohen, L. J. (1986). Approach, avoidance, and coping with stress. American psychologist, 41(7), 813.

[5] Sparrow, P. (1999). Strategy and cognition: Understanding the role of management knowledge structures, organizational memory and information overload. Creativity and innovation management, 8(2), 140-148.

[6] Kaplan, J., Frias, L., McFall-Johnson, M. (2020). A third of the global population is on coronavirus lockdown. https://www.businessinsider.com/countries-on-lockdown-coronavirus-italy-2020-3

[7] Greeven, M., & Wade, M. (2020). Chinese movie studio upturned its business model due to coronavirus – Western companies take note. https://theconversation.com/chinese-movie-studio-upturned-its-business-model-due-to-coronavirus-western-companies-take-note-131167

[8] Wade, M., & Bjerkan, H. (2020). Three Proactive Response Strategies to COVID-19 Business Challenges. https://sloanreview.mit.edu/article/three-proactive-response-strategies-to-covid-19-business-challenges/

[9] Craven, M., Mysore, M., Singhal, S., Wilson, M. (2020). COVID-19: Implications for business. https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business

[10] Gerdeman, D. (2020). How the Coronavirus Is Already Rewriting the Future of Business. https://hbswk.hbs.edu/item/how-the-coronavirus-is-already-rewriting-the-future-of-business

[11] Reeves, M., Carlsson-Szleszak, P., Whitaker, K., Abraham, M. (2020). Sensing and Shaping the Post-COVID Era https://bcghendersoninstitute.com/sensing-and-shaping-the-post-covid-era-c282cd227a4f

[12] Smit, S., Hirt, M., Buehler, K., Lund, S., Greenberg, E., Govindarajan, A. (2020). Safeguarding our lives and our livelihoods: The imperative of our time. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/safeguarding-our-lives-and-our-livelihoods-the-imperative-of-our-time

[13] Rohrbeck, R. (2020). From Uncertainty to Opportunity. https://www.linkedin.com/pulse/three-important-lessons-i-learned-business-covid-19-times-rohrbeck/

[14] Lyons, K. (2020). Verizon is buying BlueJeans, one of Zoom’s videoconferencing rivals. https://www.theverge.com/2020/4/16/21223454/verizon-bluejeans-video-zoom-conferencing-rivals

[15] McKinley, W., Latham, S., & Braun, M. (2014). Organizational decline and innovation: Turnarounds and downward spirals. Academy of management review, 39(1), 88-110.