Mastering Strategic Thinking for Business Success

Abstract

MGMT 475 – Strategic Management Capstone Class 1 Reading Key Terms and Concepts CRITICAL THINKINGBEING ANALYTICAL GOOD JUDGMENT RATIONAL vs. RATIONALIZING STYLES OF THINKING LOGICAL ARGUMENTATION PROBABLISTIC DECISION-MAKINGSTRATEGIC MANAGEMENT COMPETITIVE ADVANTAGEFIRM AS (and in) A SYSTEM This course isn’t about making you a strategist or a strategic analyst. This course isn’t really about how to ‘do strategy’. This class is a capstone, integrative course to bring together all your prior studies about business and wrap them into a way of THINKING about business that is necessary for success – your individual success and the success of your firm or your employer. Specifically, we are talking about deliberate thinking, and deliberate thinking requires a PROCESS for deriving conclusions, making decisions, and selecting among alternative choices. We, of course, are going to focus on the application of such thinking and thinking processes in relation to a business enterprise. The concepts and methods, however, are also useful for other decisions and choices you must make in your life. One flaw of human nature is that we tend to spend our intellectual capability RATIONALIZING to make the world around us fit what we believe to be true rather than BEING RATIONAL to objectively figure out cause-effect relationships and to evaluate the probability of our choices leading to desired ends. This class attempts to develop your ability to break from human nature and your natural biases, heuristics (look that up), and logic traps. Instead, the aim is to help you become more analytical and make better decisions, recommendations, and choices. What we will cover are fundamental concepts and methods for good thinking and decision making. The methods presented are not the only ways or necessarily the best ways, but they are the most widely recognized principles and approaches. A great place to start your journey as a better business thinker. ----------------- -------------------------------------------- You are taking this class as part of your greater aim to get a business degree and you are pursuing that because you want to have a successful career in business. Search the Internet for ‘how to be successful in business’ and you will get a LOT of tips and advice. But there is one underlying thing that underscores all those lists and tips and stories and advice: making good and appropriate decisions. Some things that influence your life are out of your control. For example: your parents; where and when you were born; how you were raised; were you received your primary education; etc. Your career success will, to some degree, also be affected by luck, timing, and being in the right (or wrong) place at the right (or wrong) time. There is, however, one key – even related to random luck and timing – that you can strive to control: your decisions - - your choices on how you respond to things, what goals you choose, how you choose to behave and think, and what you pay attention to and prioritize. A business enterprise (let’s call it a ‘firm’ just to be short) is really just a group of people doing things toward a common end result. Just as for individuals, the success or failure of a firm is based on choices. If you are self-employed, your firm’s results are clearly a result of your choices. If you work for a business, employees’ choices matter to some degree at some level. Getting promoted and moving up in a firm is largely determined by your ability to contribute to achieving the firm’s desired results. In other words, your ability to make and act on good decisions – and to help others make and act on good decisions – is really valuable! Choices. Decisions. Conclusions. …. it all sound so straightforward. But business is very, very, complex. Things are changing all the time – customer demands, competitors, suppliers, employees. Each of those variables is about people...and people are all different; people change their minds and behaviors all the time. And think about technology… technology is rapidly changing, sometimes radically. This creates a great deal of complexity and uncertainty for making decisions in business. It’s not just what you know, or even who you know…. It’s also about how you navigate the complex and uncertain world of business by gathering up valid information, understanding a situation (an opportunity, a problem, a decision, etc.), and getting to a conclusion, a decision, or a choice among alternatives. There is another hurdle, too. Often you will not be able to make and act on important business decisions all alone. You will need to convince and persuade people to agree and accept your conclusion and decisions. Some examples: you may need to convince the CFO to allocate resources for a new project; you may need to persuade your team that your solution is best; you may need to convince your client that your recommended solution to their problem is best. How do you make good business decisions? How do you persuade others to agree with your conclusions and recommendations? Good questions! Read on. CRITICAL THINKING In the natural science fields (medicine, geology, chemistry, physics, etc.) there are natural laws that dictate and explain how things exist or happen. Business is a social science, however. It’s all about people and how people’s choices and behaviors affect one another in complex and dynamic ways. There are no scientific, natural laws to help you make choices when people are involved. Decision-making in social sciences is about striving for a high probability of being correct, best, or otherwise successful. This is referred to as probabilistic decision-making. We can also label this ‘good judgment’ (i.e., the ability to make well-considered decisions or derive sensible conclusions.). When you apply appropriate processes and techniques in your probabilistic decision making, not only do you increase your odds of making good decisions you also enhance your ability to persuade others that your proposal or decision has a high confidence of being successful. The deliberate path to good judgments is critical thinking. First, you must choose to be a critical thinker. Critical thinking is a deliberate act, it is purposeful. Critical thinking contrasts with what Nobel Prize-winning behavioral economist Daniel Kahneman calls system 1 thinking. System 1 thinking is automatic, responsive, emotional, instinctive, and habitual thinking that drives most of our choices. System 1 thinking is based on past experiences, biases, beliefs, stereotypes, and generalizations. System 2 thinking, the deliberate and thoughtful kind of critical thinking, is about seeking to understand something so well that you can make more effective decisions related to that issue. Critical thinking requires that you: Recognize issues that deserve system 2 thinking. Problems that need to be solved Opportunities that are attractive and should be pursued Decisions that must be made Prioritize issues and decision factors What is most urgent- what decisions need to be made now What is irrelevant or of trivial importance What data is most important for a decision? How to prioritize and rank viable alternatives to select the ‘best bet’ option Gather appropriate data and evidence, organize it to understand it, synthesize a variety of data; AND - evaluate the validity of data and evidence to only use valid data Recognize assumptions, biases, opinions (system 1 thinking) as they arise – in yourself and in others involved - and set them aside to emphasize objectivity and system 2 thinking Critically evaluate your conclusions – be objective and continually self-assess Be open to changing your thinking. Be objective and open to new ideas, new evidence, and alternative conclusions and then reconstruct your own beliefs when faced with strong arguments or valid data showing that prior ones were incorrect or less likely. Based on these we can see that critical thinkers (‘smart people’), are characterized by: Clear understanding of the differences between opinions, ideas, and suggestions versus facts, evidence-based conclusions, and well-argued recommendations Their commitment to critical thinking and striving to make good and objective judgments – the quality of the decision is all that matters Open-mindedness and focus on getting to the best possible decisions They LEARN. They have an ability to admit when they are wrong, misinformed, or lacking enough information to make a quality choice – thus, they are able to change their positions when necessary. They have flexibility in their thinking, not a rigid, defensive posture to protect past positions or decisions. Did you notice that nowhere in the description of critical thinking does it say you must be ‘intelligent’? Critical thinking - which you can also call being rational, logical, or analytical – is not the same as intelligence. Studies show that often it is the most intelligent people who make the least rational choices! Here is more on this: The Difference Between Rationality and Intelligence (excerpt) By David Z. Hambrick and Alexander P. Burgoyne The New York Times, Sept. 16, 2016 {added notes are from Dr. Carter} ARE you intelligent — or rational? The question may sound redundant, but in recent years researchers have demonstrated just how distinct those two cognitive attributes actually are. It all started in the early 1970s, when the psychologists Daniel Kahneman and Amos Tversky conducted an influential series of experiments showing that all of us, even highly intelligent people, are prone to irrationality. Across a wide range of scenarios, the experiments revealed, people tend to make decisions based on intuition rather than reason. {Kahneman and Tversky described that because humans like to make quicker, easier decisions, we tend to use ‘heuristics’ (hyurr-is-tics) that help us understand things (think about assumptions, stereotypes, habits, basing everything on past experiences, etc.). When we need rationality most is when we face complex situations, but that is when – paradoxically – we are often most likely to seek mental shortcuts. We thus fall into irrationality by our biases which inhibit us from being analytical and thinking critically}. *Do a search for and learn about the various biases that can undermine your ability to make quality decisions! Here is a starter: https://thebusinessprofessor.com/en_US/management-leadership-organizational-behavior/common-biases-and-errors-in-decision-making } In one study, Professors Kahneman and Tversky had people read the following personality sketch for a woman named Linda: “Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations.” Then they asked the subjects which was more probable: (A) Linda is a bank teller or (B) Linda is a bank teller and is active in the feminist movement. Eighty-five percent of the subjects chose B, even though logically speaking, A is more probable. (All feminist bank tellers are bank tellers, though some bank tellers may not be feminists.) In the Linda problem, we fall prey to the conjunction fallacy — the belief that the co-occurrence of two events is more likely than the occurrence of one of the events. {or… because we think we are so smart, and because we humans love to solve problems, we often think (assume) a more precise answer (the ‘conjunction’ is more probable (thus correct) than a more general one.} In other cases, we ignore information about the prevalence of events when judging their likelihood. We fail to consider alternative explanations. We evaluate evidence in a manner consistent with our prior beliefs {confirmation bias} . And so on. Humans, it seems, are fundamentally irrational. {this is why those who can develop skills at being analytical and rational will generally be more successful in life!} But starting in the late 1990s, researchers began to add a significant wrinkle to that view. As the psychologist Keith Stanovich and others observed, even the Kahneman and Tversky data show that some people are highly rational. In other words, there are individual differences in rationality, even if we all face cognitive challenges in being rational. So, who are these more rational people? Presumably, the more intelligent people, right? Wrong. In a series of studies, Professor Stanovich and colleagues had large samples of subjects (usually several hundred) complete judgment tests like the Linda problem, as well as an I.Q. test. The major finding was that irrationality — or what Professor Stanovich called “dysrationalia” — correlates relatively weakly with I.Q. A person with a high I.Q. is about as likely to suffer from dysrationalia as a person with a low I.Q. In a 2008 study, Professor Stanovich and colleagues gave subjects the Linda problem and found that those with a high I.Q. were, if anything, more prone to the conjunction fallacy. {People who are more intelligent - or think they are more intelligent - can believe they know or understand more than they actually do. They then try to prove it by being more precise and more confident in their answers/conclusions. Their lack of rational thinking, however, can often lead them far, far away from good decisions and conclusions. This also occurs when people are striving to demonstrate how smart they are – I see this with students every semester!}} BEING ANALYTICAL Critical thinking…being logical…being rational. We get there by being analytical in our approach to decisions and solving problems. The word analytical has its roots in Latin language meaning ‘to break up and loosen’. Think about that. You don’t need to analyze simple things or simple decisions. You use analysis to break up complex issues, to loosen apart all the individual component pieces or elements involved in the thing/issue (i.e., the problem, opportunity, choice) you are trying to understand. By taking a complex thing/issue and breaking it apart, you can inspect the entire system of elements and how they fit and interact as one ‘thing’ (more about systems theory in a later class session). When you think analytically, you first seek to understand the thing/issue that is the focus of your attention. As noted above as the first part of thinking critically, you first must accurately identify the problem or ‘thing’ that you need to address. Before you just dive in and start addressing problems or pursuing opportunities, you’ve got to make good choices about what it is you most need to analyze. The better you understand the subject of your analysis, the better you can make informed decisions about how you will address it. You first must know what the ideal state is…what are you trying to achieve…what is the ideal outcome for or of this ‘system’? You must also know what component parts should be in the system and how they should best be connected and interrelate. By knowing what you are seeking, you can then identify what components are MISSING or are NOT connecting correctly for the system to operate as desired. Think about that…you can’t effectively fix something that is not working correctly if you don’t know how it is supposed to work. When you accurately understand the thing you are working on you can identify the cause-effect linkages that explain why or how the ‘system’ is performing as it is or how it will perform if some change is made. When you identify these underlying causal factors, you now know what it is you can address to make the system work better (i.e., to improve system performance). SYSTEMS THINKING A system is a set of things working together as parts of a mechanism or an interconnecting network. The overall performance of a system is affected by the presence and performance of each individual component of the system AND how effectively each component relates to and integrates with other components. In systems, many components are interdependent, that is they rely on one another. If something changes in one part of the system, other parts change, too (good or bad). In many systems, the breakdown of one little thing can cause the whole system to stop. Think about a car. One flat tire. One broken belt. A dead battery. No steering wheel! Think about all the things that have to work well and work well together to result in a reliable, safe automobile. A business is really just people doing things with things. People. Choices. Resources. Activities. There are inputs coming into the system (money, new people, new technologies, raw materials, etc.) and there are things produced and going out of the system (thus, a business is what is called an Open System). Within the firm, there are people organized by functional areas (departments) that must be integrated to work toward the same goals at the same time and holding to the same principles and values and overall guiding mission, vision, and values. You may have seen functional organizational charts like the one below; these are a simple (and limited) representation of an organizations functional system and how the lines of authority work. But the system is more than just who reports to whom? Finance must provide the financial resources needed by other areas to do their work. HR must provide the talent for other areas. Sales won’t produce if production can’t provide the inventory to fill orders. If the marketing people go off in a different direction than the salespeople…not good. If the supply chain people are not getting the vendors and supplies the production people need…not good. Choices and actions in one area are often interdependent, that is, to positively affect the overall firm (system) performance they must be working in synch. A business also operates within a system…and this is a dynamic COMPETITIVE context. (You can simplify somewhat and think of this as the ‘industry’ in which a firm competes). There are suppliers, buyers, competitors all continually changing and making new decisions and getting new inputs and striving to achieve greater outcomes. Inputs, such as technologies and available materials also change. There are also complex, dynamic changes related to the nature of the competitive context. Laws, societal norms, the broader economy, peoples’...