Short term vs long term - balancing tactical and strategic goals in times of crisis

Profile picture for user kmarko By Kurt Marko July 14, 2020
Summary:
Decisions reacting to a crisis can have strategic implications. There's a balancing act executives must perform during the COVID-19 crisis so as not to lose sight of long-term goals when fighting for short-term survival.

long term
(Pixabay )

Organizations of every stripe have had to make previously unthinkable decisions in this year of crisis. However, those making them might not appreciate the gravity and strategic implications of their choices. It's an understandable oversight since when your house is on fire, the last thing you worry about is water damaging the carpets.

Nonetheless, there are usually multiple options, even in times of urgency, and some come with fewer deleterious consequences or create more favorable conditions for recovery than others. It's a tall order asking executives to plot the optimal course when they are trying to ride out the storm of a lifetime. However, the leaders that can quickly toggle between strategic and tactical thinking will allow their organizations to not just survive, but thrive when the crisis abates.

Keeping your head 

The angst that continues to haunt many CEOs is underscored in Jon Reed's recent article detailing results from a CXO survey. Topping the responses to a question about their chief concerns was the long-term survival of the organization and the situational and behavioral unpredictability created by the pandemic. An executive from the technology consultancy that conducted the survey explained that the heightened concern on long-term survival stems from multiple threats including the collapse in  demand for product and services, disruption to logistics and work environments and increased health risks to employees (emphasis added):

Obviously people are learning new information as the crisis unfolds. I think the worry about long-term survival is: think about the challenges now. I think we've all realized that the economic impact is going to be deeper and longer, impacting lots of areas in the economy. … Many businesses are simultaneously having to worry about their employee experience, whether it's a more knowledge-based services industry, where they're thinking about working remotely, and all the concerns you have there.

The persistent uncertainty of these executives is understandable given the unprecedented circumstances. However, to paraphrase Kipling, the most successful will be those that can keep their heads while all around them lose theirs. Such leaders are not only able to act rationally in times of crisis, but understand the strategic implications of reactionary decisions.

The cruise industry provides an example 

The cruise industry, one of the hardest-hit business segments during the pandemic, offers a stark example of needing to balance short- and long-term decision making. Like other travel and tourist businesses, cruise lines effectively shut down in March after the Diamond Princess and several other liners became floating prisons as COVID-19 afflicted hundreds of passengers. With prospects dim for a swift resumption of normal tour operations, company executives faced difficult decisions about the fate of their most expensive assets. 

A recent Bloomberg adrticle outlines the conundrum facing cruise executives facing extended disruption of their operations. Idling a gigantic ship isn't a simple process and presents several options that entail trading off the costs of storage versus the time required to return a vessel to service. As detailed by this ship layup guide, at one extreme is a hot ship lay-up suitable for a month and can reactivate a ship in 24 hours. At the other extreme is long-term lay-up for vessels that will be inactive for five or more years and that requires three-months of extensive internal reconstruction before being sea-worthy. Given the mechanical degradation that occurs to metallic equipment sitting in the corrosive ocean atmosphere, many companies avoid such long-term storage. According to Bloomberg (emphasis added):

If that sounds like a slow and painful death, some companies are just ripping off the Band-Aid instead. In its second-quarter financial filing, Carnival said it plans to retire at least six older ships, which could potentially be sold another cruise company or for scrap—usually for anyone’s best offer.

The economic situation has deteriorated so rapidly that Bloomberg's numbers are already outdated. Last week, Carnival announced that it plans to eliminate 13 ships or 9% of its fleet as the cash burn of idling vessels has proven unsustainable. According to Carnival's CEO (emphasis added):

[We’re] reorganizing the company to emerge stronger, leaner and more efficient, Even when we return to full-scale operations, we don’t expect to return to the same staffing requirements, as we are addressing our work streams to work in a more efficient manner.

Cruise executives thus face a problem with several financial, medical and psychological uncertainties that combine to have vast implications on their company's long-term success, including:

  • How rapidly might the health risks abate in each of their major markets?
  • How soon will vacationers be comfortable embarking on multi-day cruises?
  • How deeply must they discount to attract a sufficient number of passengers for each trip yet still break even?
  • Which routes are likely to be the most popular and should how should they allocate passenger capacity around the world?
  • How much cash can they afford to burn to keep liners ship-shape?
  • How much additional cash might they raise through private or government loans and how much debt service can they afford to add?
  • How to allocate vessels to different types of storage?
  • What are their long-term capacity needs and should they permanently scrap older vessels?
  • Are there other uses for newer ships as permanently-docked hotels or condominiums that would yield a greater return than scrap?

Each of these questions involves trading off short-term actions to survive a crisis against their company's long-term success or even viability. Cruise line executives were under tremendous pressure to alleviate the imminent crisis, namely getting passengers and crews on afflicted vessels safely to shore after managing lengthy quarantines, minimizing cash burn rate and bolstering financial reserves. However, should executives optimize for these short-term goals, they risk limiting long-term success by hampering their future operations and surrendering market advantages to competitors that acted more strategically.

Using machines to compensate for cognitive bias

Perhaps the largest challenges many executives must overcome are the cognitive biases inherent in human psychology. Gaps in rationality such as the confirmation bias, the sunk cost fallacy and recency bias cloud one's thinking and lead to poor decisions. As this HBR article on AI-driven decision making points out, our very survival instincts can lead us astray when evaluating complicated situations such as those executives face (emphasis added):

These biases influence our judgment and decision-making in ways that depart from rational objectivity. We give more weight than we should to vivid or recent events. We coarsely classify subjects intro broad stereotypes that don’t sufficiently explain their differences. We anchor on prior experience even when it is completely irrelevant. We tend to conjure up specious explanations for events that are really just random noise. These are just a few of the dozens of ways cognitive bias plagues human judgment and for many decades, it was the central processor of business decision-making. We know now that relying solely on human intuition is inefficient, capricious, fallible and limits the ability of the organization.

Executives have access to more data than ever before, which logically should lead to better-informed decisions. However, the added data is often detrimental to decision makers since it can cause analysis paralysis. 

AI in the form of decision-support models might offer a way to counteract such human frailties and assist executives in analyzing alternatives, objectively assessing data and balancing tactical and strategic goals. The HBR article illustrates a process model that combines the strength of machines, namely the ability to rapidly analyze massive amounts of data and scenarios, and the human mind's capacity for creative insights and informed judgment. 

KurtM
(HBR, What AI-Driven Decision Making Looks Like)

An Accenture paper describes the many ways that algorithms can aid executive decision making. Of note is the ability to counter cognitive biases that impair balancing short- and long-term goals. As Accenture puts it (emphasis added):

Executives can use intelligent machines to enhance systemic thinking. In an uncertain and turbulent business environment, it’s easy to overlook the long-term implications of short-term decisions, particularly when the current conditions have been shaped by events and decisions that occurred before the incumbent executives entered their roles.

 

My take

The COVID-19 crisis is likely the most challenging situation many executives will ever experience since it arrived without notice, immediately upset both business and personal environments and requires making decisions with life-and-death consequences for one's organization, employees and customers. Leaders that manage to navigate such treacherous conditions without losing sight of strategic goals will thrive once the crisis abates. 

The crisis not only presents a test of human leadership, but an opportunity for machine-enhanced decision making processes that combine the strengths of each. As Accenture notes, machines can't replace human judgment, but can improve it:

In essence, intelligent machines should be used for what they do best—e.g., leveraging the objective “outsider” status and observational skills to optimize team behaviors. This will then free humans to focus on what they do best—such as applying judgment skills.

Hopefully, such capabilities will be common in executive boardrooms when the next crisis hits.