The current Harvard Business Review (HBR) edition contains an article titled “Inconsistent decision making is a huge cost for many companies.”
Authored by Daniel Kahneman and others, it details how delusional optimism can lead executives to choose the wrong strategic path.
Kahneman is a psychologist who shared the Nobel Prize in Economic Sciences in 2002. In the article, he argues that human judgment, especially by professional employees, is often influenced by such irrelevant factors as the weather. As a result, decisions vary from employee to employee.
He refers to this as “chance variability” or “noise” that is, more often than not, costly to the organisation.
In a competitive environment, an organisation would not survive if such an organisation was not aware of such cost.
Last year, months before this HBR article and before the troubles at Kenya Airways (KQ) were first reported, I wrote an article arguing that the airline’s pricing model was costing them business.
I narrated my personal experience where my sponsors would buy me an Ethiopian Airlines ticket to fly to Dar es Salaam.
I would always fly to Addis Ababa then to Dar, taking three more hours than it would normally take me to fly direct to Dar from Nairobi.
Several times, I sought quotations from the KQ website, but it always defaulted to an online booking platform called eDreams, which consistently gave Ethiopian Airlines as the cheapest on the route.
At times I would call KQ agents two to three times to verify the price and in almost all cases, they would give very different quotations that were exceedingly higher than the competition.
The problem is even worse when it comes to cargo. However, when booking is made through its partner KLM, the bids are often competitive.
Going by Kahneman’s words, there is lots of noise about KQ decision-making process and it could be one of the contributing factors that have put the airline on a downward spiral.
In its comeback strategy, the airline must seek to close this loophole through regular noise audit, which the HBR article says should consist of a unit that is working independently to evaluate a common set of cases.
The degree to which their decisions vary is the measure of noise. It will often be dramatically higher than executives anticipate. Use of third party platforms on leveraging online sales far compromises their competitiveness than if they had no online presence.
There is no logic in effectively telling the customer that you are not the best in terms of pricing.
Although noise may not be acknowledged by strategic managers, some employees often see it and either expect action or demand more from the organisation owing to the fact that resources are leaking at their own expense.
The KQ pilots union had even issued a strike notice. They were perhaps tired of inconsistent decision making, especially in cases of governance, the existence of which the airline itself admitted in a paid advert without any action being taken.
When such happens, it tends to erode trust in top management level. This explains why the chairman and CEO must leave in order to restore trust.
A quick review of the performance of airlines across the world reveals that the past two to three years have been the best.
Fuel, which is one of the major expense items, is at its lowest and might remain that way for some time.
One of the most important indicators in the airline industry, the load factor (number of passengers carried as a percentage of seats available for sale) has been at its best for all except African and Latin American airlines.
Financial indicators too are positive in all regions except in Africa. The sources of difference are more likely to be management practices that do not seek to understand hidden costs.
The HBR article proposes a radical solution in places where noise problem is severe. It argues that the best solution is to replace human judgement with algorithms.
Although algorithms are fairly easy to construct, they are often politically or operationally infeasible.
The study recommends that in such instances, companies should establish procedures to help professionals achieve greater consistency.
Kahneman’s seminal article is an eye opener to many organisations that hitherto ignored cost associated with inconsistent decision-making.
It comes at a time when African managers are failing, perhaps due to inability to understand emerging hidden costs that undermine the organisation’s competitiveness. The article is a must-read for any strategy manager.
Like Thomas Aquinas said: “If the highest aim of a captain were to preserve his ship, he would keep it in port forever.”
Let’s try to overcome the KQ turbulence and keep flying.
The writer is an associate professor at the University of Nairobi’s School of Business