Tuesday, January 30, 2018

Declining industries


Why is it so difficult for leaders in various industries and sectors to seriously address the existential threats that sometimes arise? Planning for marginal changes in the business environment is fairly simple; problems can be solved, costs can be cut, and the firm can stay in the black. But how about more radical but distant threats? What about the grocery sector when confronted by Amazon's radical steps in food selling? What about Polaroid or Kodak when confronted by the rise of digital photography in the 1990s? What about the US steel industry in the 1960s when confronted with rising Asian competition and declining manufacturing facilities?

From the outside these companies and sectors seem like dodos incapable of confronting the threats that imperil them. They seem to be ignoring oncoming train wrecks simply because these catastrophes are still in the distant future. And yet the leaders in these companies were generally speaking talented, motivated men and women. So what are the organizational or cognitive barriers that arise to make it difficult for leaders to successfully confront the biggest threats they face?

Part of the answer seems to be the fact that distant hazards seem smaller than the more immediate and near-term challenges that an organization must face; so there is a systematic bias towards myopic decision-making. This sounds like a Kahneman-Tversky kind of cognitive shortcoming.

A second possible explanation is that it is easy enough to persuade oneself that distant threats will either resolve themselves organically or that the organization will discover novel solutions in the future. This seems to be part of the reason that climate-change foot-draggers take the position they do: that "things will sort out", "new technologies will help solve the problems in the future." This sounds like a classic example of weakness of the will -- an unwillingness to rationally confront hard truths about the future that ought to influence choices today but often don't.

Then there is the timeframe of accountability that is in place in government, business, and non-profit organizations alike. Leaders are rewarded and punished for short-term successes and failures, not prudent longterm planning and preparation. This is clearly true for term-limited elected officials, but it is equally true for executives whose stakeholders evaluate performance based on quarterly profits rather than longterm objectives and threats.

We judge harshly those leaders who allow their firms or organizations to perish because of a chronic failure to plan for substantial change in the environments in which they will need to operate in the future. Nero is not remembered kindly for his dedication to his fiddle. And yet at any given time, many industries are in precisely that situation. What kind of discipline and commitment can protect organizations against this risk?

This is an interesting question in the abstract. But it is also a challenging question for people who care about the longterm viability of colleges and universities. Are there forces at work today that will bring about existential crisis for universities in twenty years (enrollments, tuition pressure, technology change)? Are there technological or organizational choices that should be made today that would help to avert those crises in the future? And are university leaders taking the right steps to prepare their institutions for the futures they will face in several decades?

4 comments:

jed said...

Depending on the discount rate, a decision to spend scarce cognitive resources on longer term thinking may be entirely rational. Investors and executives may not see benefits from results more than a few years in the future.

This seems irrational when the crisis hits and the theoretically responsible people say "whocouldanode?" But they typically can still retire with a lot of money in the bank. Very few executives or investors go down with the ship.

This is also true with disasters like Deepwater Horizon and the 2008 housing finance crisis. The rational -- and profitable -- course for most companies was to ignore the risk and rake in the dough.

GrueBleen said...

This isn't exactly a new or unknown problem, is it. Indeed there are plentiful examples throughout all of known human history amongst all ethnicities and 'nationalities'.

So what to do about it ? Who can we turn to to get us to take a 'longer view' ?

Besides, when firms die - whether because of situational changes at the time or lack of foresight - don't we all benefit from the continuing process of 'creative destruction' ? There are even those who postulate that 'work productivity increases' are almost exclusively fueled by creative destruction and that the low rate of productivity increase is mostly due to and increasing monopolisation of market inhabitants. And that monopolies don't do much productivity investing because they don't have to.

So if we do learn to take a longer view, will that really be a good thing after all ?

john said...

Consider instead that the path from current operations, which is profitable, to potential new operations being worked by upstart competitors, which may not be profitable but has higher NPV, may not be linear, as implied in "bias towards myopic decision-making", "weakness of the will", "accountability", etc. A structural financial reason can mean an alternative path is deadly costly. The tree of possible paths has incumbents out one limb, but the high NPV is on another limb, and the path back to the trunk to get there involves financial failure.

Anonymous said...

http://www.nybooks.com/articles/2018/02/22/the-business-of-learning/?printpage=true

Just published, an interesting review article on this subject.