According to research by McKinsey & Company, an estimated 20 per cent of business owners believe their business excels in decision-making – and that was pre-COVID!
So, amid far greater uncertainty, what steps can business owners take to improve their confidence in decision-making?
Critically, it’s important to consider the broader economic environment and whether some fiscal and monetary levers could impact your business.
Inflation rates are a good starting point, providing an indication of how the macroeconomic environment is evolving. Annual inflation rates are beginning to rise significantly across developed economies in particular. The US recently hit an annual rate of 5.4 per cent and New Zealand is also experiencing its highest rate of inflation since 2011. The annual rate as at the end of June 2021 jumped to 3.3 per cent, which more than doubled the annual rate posted in the March 2021 quarter results.
While inflation in Australia has been relatively subdued to date, with the record high levels of stimulus combined with the record low interest rates, speculation is rife about whether – or when – rates are likely to rise. In times of uncertainty, traditional approaches to decision-making can be dangerous. Business owners with a strong bias for action, and a just-do-it approach to management can inadvertently lead their businesses astray. On the other hand, business owners who are more risk adverse, and slower to act, can find themselves in a state of decision paralysis.
While both approaches have merit under normal operating conditions, effective decision-making in times of uncertainty needs to be more calculated, informed and timely than usual.
The best performing businesses are realistic and acknowledge the conditions they are trading in. They consider the alternative scenarios and then focus on the things within their control. They will generally have a strong understanding of the key drivers within their business, monitor them closely and act both quickly and decisively when required.
There will be nuances depending on the industry and sector operated in, as well as the financial strength of any one business, which can impact decision-making, but understanding alternative scenarios is advised irrespective of its position.
If you find yourself in a position where things are turned upside down, you should be ready to take the steps required to protect your position. Conversely, there can also be real opportunities among the chaos for some businesses to position themselves for longer-term success.
Some of the key questions for business owners include:
- What are the key drivers of demand within our sector?
- How are the needs of our clients changing throughout this period?
- How are we positioned against our competitors and what makes us different?
- Do we have forecasts on key metrics to provide us with foresight?
- Have we considered the worst-case scenario?
- Can we improve operational efficiencies?
- Are there any opportunities within the uncertainty?
- Do we need help?
Business owners need to be ready to make informed decisions if forced into action by circumstances outside their control. The businesses that can answer these questions will be almost certainly be better placed to survive and prosper.