Businesses should beware of knee-jerk reactions

knee jerk reactionsBeing agile and responsive may be good business practice, but there is a fine line between this and knee-jerk reactions.

While the former can be described as considered responses to relevant data, the latter are more likely to be immediate, unthinking and emotional.

While some instant reactions may turn out to have been productive, overall the chances of such a decision working out well are not high and probably not the best way to run a business.

Knowing when prompt action is needed and when it is better to hold your nerve

Monitoring data on business performance, invoice payments, sales, responses to marketing initiatives and a wealth of other relevant information is, or should be, and integral part of running a business.

However, understanding what that data implies can be much trickier.

The key is to be aware of both the time frames and implications in order to draw reliable conclusions.

A good example is statistical information such as the monthly trends like the PMI/Markit index that reports on activity in the service, manufacturing and other sectors of the economy, or the daily ebbs and flows of the stock market.

Not only can statistics be selective, highly dependent on sample size and on the information selected for measurement, it can take several months before a trend becomes clear.

While some investors trade stocks on almost a minute by minute basis depending on the rise and fall of share prices for a company or commodity, this sort of short term approach to events is unlikely to work well for a business. Indeed, it is not the strategy pursued by investment guru Warren Buffet.

Another difficulty with the knee-jerk reaction is that it may rely on emotional factors, such as confidence or lack of it, panic, self-interest or a desire to win at all costs. This is when investors can lose by following the herd instead of holding their nerve and following the data.

The tools to use to avoid knee-jerk reactions

Any business that has done a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) to inform its business plan and goals will have some protection against unconsidered decisions. Although remember ‘SWOT SO WHAT’, the key to a SWOT analysis is use it as the basis for making decisions.

A second tool is the contingency plan that outlines possible actions and reactions for a variety of scenarios.

Using these in conjunction with analytical data gathered over a sufficient period, relevant to the nature of the business, will improve the chances of making decisions about change that will have the optimum outcome for the business.

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