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Management misconceptions during economic crises

Author: Dr Simon Moss


Not all organizations will decline during the looming or likely global recession. A multitude of factors affect the likelihood that organizations will flourish or flounder: the sector in which they operate, the resources they have accrued, the efficiency of their operations, and indeed many other characteristics. Unfortunately, most of these factors cannot be readily modified. A company that manufactures luxurious automobiles cannot immediately become involved in the health sector.

Fortunately, management and leadership practices can be modified, and these practices significantly affect the capacity of organizations to withstand any decline in economic growth. Paradoxically, however, recent research has shown that organizations, during times of economic hardship, tend to apply management and leadership practices that damage their productivity and progress. This article presents a set of misconceptions that organizations are especially likely to demonstrate during these challenging times.

Commitment to failing initiatives

During demanding periods, managers become more likely to show an ineffective tendency, called escalation of commitment, in which they persevere with initiatives that are no longer viable. That is, managers often persist with failing initiatives-training programs, marketing campaigns, and strategic changes, for example-in which they have invested significant funds. Frequently, managers do not like to terminate these initiatives, even though undue persistence with these programs is likely to squander even more money.

When recession is looming or prevailing, this commitment to unviable initiatives becomes even more prevalent. During these periods, managers are often unable to fulfil many of their other goals and commitments, because of limited funds or opportunities. The obstruction of their goals and values has been shown to amplify their inclination to persist inappropriately with flawed initiatives. A more supportive culture, in which individuals are permitted to share their concerns and doubts, would tend to curb these destructive tendencies.

Leadership selection

In addition to the selection and implementation of unsuitable practices, organizations also will often choose inappropriate leaders. Managers who can ensure that goals and targets are reached-and that requisite tasks and activities are completed-are preferred by executives and boards. That is, organizations will select managers who can coordinate activities effectively, ensuring the necessary resources are available. Boards like the clarity and efficiency these managers can offer.

Although these qualities are certainly desirable, managers who demonstrate these attributes are seldom inspirational or visionary& they are unlikely to disseminate a rousing, unifying vision of the workgroup, department, or organization.

Interestingly, during crises, such as economic decline, employees in the organization do not work as effectively when the managers focus on ensuring that goals and targets are fulfilled. Instead, they prefer leaders who promulgate an inspiring vision. This vision seems to impart a sense of uniformity, which tempers the anxiety that crises evoke and ultimately improves the efficiency, innovation, and engagement of employees.

Pessimistic forecasts

Rather than inspiring, most managers become unnecessarily pessimistic and cynical. A decline in consumer confidence and availability of credit will, naturally and appropriately, promote many pessimistic forecasts. As a consequence, managers might often retrench some employees, discard some initiatives, and reject some investments-curbing innovation and progress. These responses may be suitable and rational, provided the forecasts are, at least mildly, accurate. Unfortunately, most forecasts of economic growth are wildly and erroneously pessimistic.

Several of the prevailing forces and responses that operate during times of economic recession magnify this pessimism. To illustrate, managers often underestimate the impact of economic impediments on their rivals. That is, they have been shown to assume, albeit unconsciously, their own organization is more vulnerable to these challenges. As a consequence, they underrate the likelihood that difficulties experienced by competitors can also unearth unanticipated opportunities.

Rejection of alternative perspectives

During economic crises, not only are the benefits of visionary leaders often discounted, the perspectives of insightful, innovative experts tend to be disregarded. During periods of economic turbulence and uncertainty, individuals often experience a profound sense of vulnerability. Such vulnerability has been shown to provoke a need in individuals to seek opinions that align with their extant attitudes and perspectives. Therefore, they tend to reject alternative paradigms, arguments, and ideas.

Because of this tendency, innovation and change naturally dissipates in response to the economic downturn. Managers become less inclined to modify, discard, or improve their extant processes and procedures. They instead adhere to conventional practices. These existing processes and procedures, however, often do not accommodate the unique challenges and opportunities that economic instability can afford.

Unpredictable shifts in direction

Despite this resistance, managers often change their directives erratically and unpredictably. That is, economic instability provokes psychological stress in managers. In this agitated state, specific circuits in their brain seem to be inhibited, and managers become somewhat disconnected from their personal intuitions and values. Instead, managers become unduly influenced by close colleagues and friends. That is, although they disregard innovative perspectives from outside their own social network, they become too sensitive to the arguments of friends and co-workers.

With limited awareness of their personal values, and undue sensitivity to the advice of friends and colleagues, managers seem to shift their opinions erratically and unnecessarily. One week they might decide to introduce some campaign. A week later they might decide to drop this campaign and embark on another pursuit instead. They change unpredictably, often in response to tenuous opportunities or sketchy advice. The efficiency of their workgroups dissipates, as many of the goals and activities that employees begin are discarded midway. Hence, at a time in which waste needs to be minimized, the productivity of many organizations actually declines.

Relationships with customers

Organizations do not only tend to respond unsuitably to their employees, but also do not interact optimally with customers. For example, because of economic uncertainty, many facets of the products and services remain uncertain. Managers and employees are often not certain whether a certain product line will be maintained or whether a specific service will be delivered on time. Often, they will express this uncertainty, either explicitly or tacitly, to their customers.

Yet, during times characterized by economic instability, customers prefer clarity over progress. That is, customers are not especially concerned with enhancing their resources, status, wealth, and so forth-but instead value clarity and certainty. Indeed, they would rather be informed that some service will be delayed or cancelled than be uncertain but hopeful.

Unsuitable marketing campaigns

In addition to customer service, marketing also declines during times of economic crisis. Some marketing campaigns are intended to emphasize the problems that could arise if customers did not purchase some product or service, such as some form of insurance for example. Organizations often intend to instil fear and shock in customers, especially during economic crises when individuals are more sensitive to potential complications.

Shock and fear can elevate sales, but also tend to increase returns and dissatisfaction. That is, when such campaigns are applied, customers are more inclined to regret their purchases. During turbulent times when customers primarily seek clarity and certainty, not progress and improvement, such regret is especially damaging to the reputation of these organizations.

Conversely, other marketing campaigns are intended to afford customers with a sense of escape from a demanding economic climate-such as absorbing movies or exotic vacations. Despite many contradictory beliefs, research indicates economic instability does not enhance receptivity to such campaigns. Customers prefer predictable, plausible, safe, and secure products or services during these times. Other features of products and services tend to be regarded as futile, reducing sales.

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Last Update: 5/30/2016