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Volume 16, Number 12
December 2010

Keeping your head

Rob Mitchell’s research shows when and why managers make erratic strategic decisions

In a fast paced and changing business environment, leaders are often pressed to act quickly on opportunities. Yet the quality of their strategic decision making doesn’t usually suffer as a result. In fact, it can actually improve.

That’s one of the key findings in a recent paper about to be published by Ivey Professor Rob Mitchell in the Strategic Management Journal. In the study Mitchell investigated when and why managers make erratic strategic decisions.

Research shows that to be sustainable, firms need to make decisions strategically. A decision is strategic when it’s consistent with the goals of the firm. Yet research also shows that many strategic decisions are not consistent but erratic, resulting in inefficiency and poor performance.

In his study, Mitchell asked CEOs from 64 technology companies to evaluate hypothetical opportunities and decide whether to commit resources. In all they made more than 2048 strategic decisions. Some were more prone to be erratic, and others not. To better understand why, Mitchell looked at both the internal thinking process and the context in which decisions were made.

Mitchell found that the CEOs with more metacognitive experience were less likely to be erratic. Metacognition can be defined as “thinking about thinking,” or “having experiences that lead to self knowledge.” A person who feels that he or she knows how to think about a task to best accomplish it is more metacognitive than a person who has not had similar thoughts or feelings. For example, someone who feels that he or she makes poor decisions in a rush would think metacognitively by consciously avoiding those kinds of situations as a result.

Perceptions of the external environment also have an impact on decision making. An environment is perceived to be hostile where there are lots of threats, such as high failure rates, low customer loyalty, and frequent price wars. An environment is perceived to be dynamic when it is constantly changing. In a dynamic environment it’s difficult to forecast such things as the number of competitors, the demand for a product, or the preferences of customers.

Mitchell found that leaders tended to make more erratic strategic decisions in hostile environments. “In a hostile environment decision makers are more prone to be disorganized, haphazard, desperate, and even panic-stricken,” he says.  “They are not able to manage their decision making processes as well because of the threats that exist in the environment.”

To his surprise, he found that managers made fewer erratic strategic decisions in dynamic environments. “We expected that engaging in multiple cognitive activities as a result of dynamism in the environment would lead to disruptive information processing,” he says, “but we actually found the reverse. In more dynamic environments managers were better able to focus on exactly what needed to be done.”

Some business environments are both hostile and dynamic. Mitchell found that the effect of hostility on erratic decisions was positive in an environment with low dynamism. But he found that the effect of hostility was negligible in a highly dynamic environment. “The interesting thing is that dynamism actually tempers the effect of hostility,” he says. “In dynamic environments managers are actually able to tune out distraction and reduce the extent to which they make erratic decisions.”

Mitchell’s research has important implications for managers in practice. Managers can become more consistent in how they make strategic decisions by working on their metacognitive skills. This involves being attentive to how they think about making decisions, how they organize their time, and how they select and process information.

Mitchell also recommends that managers who want to be less erratic in their decisions seek out dynamic and rapidly changing environments. “Our results would seem to suggest that a skill set can be developed as a result of making strategic decisions in such an environment,” he says. “It’s important for managers to recognize that.”

Seeking dynamic environments is particularly important when you find yourself in a hostile one. “In a threatening environment, a manager may want to take on a more entrepreneurial focus,” he says. “Pursuing more opportunities and pushing the limits of the kinds of environments you are in would seem to reduce erratic decisions.”

Mitchell’s research contributes to the idea that both companies and their decision makers thrive in dynamic environments.  “Our results suggest that an important way for an organization to create competitive advantage is to strategically and consistently focus on and pursue new opportunities.”

“Erratic strategic decisions: when and why managers are inconsistent in strategic decision making,” co-authored by Rob Mitchell, Richard Ivey School of Business, Dean Shepherd, Indiana University, and Mark Sharfman, The University of Oklahoma, will be published in an upcoming issue of the Strategic Management Journal.

Professor Mitchell's Homepage