Decision-Making Process During Different Stages of Business Lifecycle

Introduction

The decision-making process in business is a matter of increased attention among scholars around the globe. In general, there are seven steps of the decision-making process, including identifying the decision, gathering information, identifying alternatives, weighing the evidence, making a choice, implementing the decision, and reviewing (Vermeulen and Curseuurseu, 2008). While the process is straightforward, it can be affected by various types of biases, which may differ depending on the stage of the business lifecycle. Therefore, it is of extreme importance for an entrepreneur to be aware of possible pitfalls in the decision-making process to ensure stable development at every stage of the business lifecycle.

Researchers and professionals distinguish between five stages of the business lifecycle, including birth, growth, maturity, revival, and decline (Tian, Han, and Zhang, 2015). However, some add additional stages to the model and identify seven steps, including seed, start-up, growth, shake-out, maturity, decline, and exit (Addison&Co, no date). The dynamics of cash, sales, and profit among the stages are demonstrated in Figure 1 below.

Considering the dynamics presented above, it is of extreme importance to be aware of where the business is to make adequate decisions. The present paper aims at describing the decision-making process during different stages of the business lifecycle based on research, expert opinions, and personal experience.

Seed and Start-up

The seed stage of a business is the period when a company exists only as an idea inside a person’s mind. At this stage, an entrepreneur is occupied with matching business opportunities to personal skills, experience, and passion. Other concerns include deciding on the business ownership structure, finding funding sources, and business planning. During this stage, the most likely pitfalls are underestimation of needed resources, poor judgment about market needs, and inadequate time management (Addison&Co, no date). The present paper fuses the start-up stage and the seed stage, as they are both beginning stages of business and associated with similar biases. Start-ups need “to establish a customer base and market presence along with tracking and conserving cash flow” (Addison&Co, no date, para. 3). Therefore, all the decisions made during these two stages are vital for the survival of the company, as it is exceptionally fragile and dependent upon outside investments.

Personal experience during the formative assessment demonstrates that the most likely problem during this stage in decision-making is the anchoring trap. This trap is associated with giving too much weight to the information that was first received (Hammond, Keeny, and Raiffa, 1998). This can lead to a biased understanding of an idea and confusion among other stakeholders. Anchors are systematically used by well-informed negotiators to promote their ideas (Hammond, Keeny, and Raiffa, 1998). In order to avoid this trap, it is vital to be aware of possible anchors, approach the problem from a different perspective, identify one’s position before consulting the others, and avoid anchoring other stakeholders before they have a chance to state their opinions (Hammond, Keeny, and Raiffa, 1998). Personal experience shows that leaders need to be especially aware of this trap, as they have a significant influence on others. As a result, if a leader anchors all the other stakeholders, the business plan is more likely to be biased, which will cause significant issues during the later stages. While leaders should avoid anchors at any stage of the business lifecycle, the seed stage is most sensitive to the matter.

During the start-up stage, another type of bias becomes evident, as the initial prognoses about the needed resources and possible market performance are often revised. According to Addison&Co (no date), companies in this stage often realize that they underestimated money needs and time to market. This is often a result of the estimating and forecasting traps mentioned by Hammond, Keeny, and Raiffa (1998). Most people are overconfident about their estimations and forecasts, even if they do not have appropriate skills (Hammond, Keeny, and Raiffa, 1998). As a result, entrepreneurs fall into one of three traps, which are overconfidence, prudence, and recall ability traps. The problem is that people often set too narrow ranges of possible outcomes, are overly cautious about high-stakes decisions, or base their judgments too much on the past events (Hammond, Keeny, and Raiffa, 1998). In order to avoid these biases, entrepreneurs need to utilize the cognitive (balanced) thinking style. According to Ettlie et al. (2014), cognitive style is associated with a high degree of innovation, which is vital for start-ups.

It is also vital to understand that on the group level, stakeholders may tend to agree with a viewpoint or conclusion that represents a perceived group consensus even if it is invalid. According to the Groupthink theory, the group members may have an illusion that they cannot be wrong due to collective rationalization (Janis, 1972). As a result, stakeholders may propose non-optimal decisions as long as they are perceived to be a consensus of all ideas. This can lead to suboptimal choices causing inadequate estimations of needed resources and time. However, this phenomenon may be avoided by making different people responsible for different decisions. For instance, it should be acknowledged that the opinion of a legal advisor is of little value when discussing financial problems, and it is only natural that an accountant will be responsible for estimating the possible expenses. In other words, every person’s opinion should have assigned roles and identified weight in every situation to avoid groupthink traps (Harvard Business Review, 2016). Bias is decreased when everyone feels their personal responsibility for some part of the project.

In general, in order to avoid biases and ensure success during the first two stages, it is vital for the entrepreneur to have revolutionary thinking (Corbett et al., 2018). Immigrant entrepreneurs are often characterized to have such thinking, as they are less likely to hold biases about the situation in the country (Corbett et al., 2018). Therefore, when forming a project team, a business can benefit from cultural diversity (Wang, 2018). It is crucial to introduce diversity in the company from the start, to ensure long-lasting course on innovation.

Growth and Shake-Out

During the growth stage, sales and revenues begin to increase, and by the middle of the stage, the cash flow becomes positive, and the company starts to pay for its expenses. The problem’s central problem becomes to sustain the growth, and entrepreneurs are forced to learn how to train and delegate to be successful in this stage (Addison&Co, no date). The primary decisions made during this stage concern accounting and management systems as well as new hires (Addison&Co, no date). The growth stage may require a new business plan to correct the mistakes of the two previous steps. During the shake-out stage, the sales peak, while profits slowly start to decline (Corporate Finance Institute, no date). The company gradually becomes stagnant, and the decisions become less innovative.

These two stages are associated with the growth of so-called sunk cost trap. According to Hammond, Keeny, and Raiffa (1998), this is a deeply rooted bias that forces people to make decisions to justify past decisions. Trying to invest in training a person who should not have been hired in the first place is an excellent example of sunk cost bias. If a company enters a growth stage, it implies that the initial business plan was good enough to achieve success. However, it is still possible to rethink some of the critical points of the business plan while the company is still vibrant. According to Pech and Cameron (2006), managers need to be systematic and structurally coordinated in decision-making. However, entrepreneurs need to be more heuristic and promote innovation in all the stages of the business life cycle (Pech and Cameron, 2006). Thus, while the majority of decisions are still reversible, it is vital to avoid sunk cost bias.

The mentioned pitfall is avertable if an entrepreneur is aware of efficient techniques to avoid it. According to Hammond, Keeny, and Raiffa (1998), sunk cost bias is rare in companies where the failure-fearing culture is not cultivated. The problem is that people responsible for bad decisions are more likely to drag the failed projects endlessly in fear of penalty. Additionally, it is also wise to listen to the opinions of parties not involved in the decision-making process to acquire a fresh, unbiased view of the situation. Finally, entrepreneurs can test their past decisions and decide if they were inappropriate.

On the group level, the team starts to feel the effects of polarization, which means that some members begin to incline toward more extreme opinions or intentions to act (Stoner, 2013). This implies that people become more confident in their correctness by merely participating in a group activity or listening to the opinions of others (Stoner, 2013). This phenomenon can be hazardous in entrepreneurship, as decision-makers become less cautious and may favor risky decisions without an apparent reason. The financial success of the growth stage may reinforce overconfidence in all the group members, which makes the phenomenon even more dangerous. Therefore, it is vital that entrepreneurs have independent experts comment and revise the decisions before they are enforced. Personal experience demonstrates that growth and shake-out stages are usually accompanied by the feeling of “hype,” which can become a source of bias and unwanted outcomes.

Maturity

During the maturity stage, sales begin to decrease slowly, and profit margins become thinner. It is usually a stage when an entrepreneur tends to relax as the business has enough loyal customers that ensure a stable cash flow (Corporate Finance Institute, no date). However, it is a crucial period that can be followed by an expansion stage or a decline stage, depending on the made decisions. This is a stage that should be focused on improving productivity through automation and outsourcing (Addison&Co, no date). The maturity period is associated with the most significant number of biases that can affect the decision-making process.

One of the most frequent traps is the status-quo trap, which is based upon a belief that all the decisions made are rational and objective. As the majority of decisions before the maturity stage led to success, innovation becomes unwanted, as it would be associated with damages to people’s ego and coming out of comfort zones (Hammond, Keeny, and Raiffa, 1998). This phenomenon can be explained by the fact that people become are more conservative when it comes to losses and more adventurous when it comes to gains (Kahneman, and Tversky, 1982). All the previous stages encouraged entrepreneurs to be more risk-taking, as they did not have particularly much to lose. During the maturity stage, risks lead to direct losses, which makes the entrepreneurs less innovative. Such bias in decision-making can lead to failure to react to changes in the environment that require immediate changes (Hammond, Keeny, and Raiffa, 1998). Therefore, entrepreneurs need to be aware of the pitfall and utilize efficient strategies to avert it.

The central strategy to avert stagnation and jump from maturity stage to expansion stage is by promoting innovation. Entrepreneurs are to look for innovators and use their personal traits to revitalize business (Sandberg, Hurmerinta, and Zettinig, 2013). Even though entrepreneurs are a heterogeneous group, successful business people are open to change (Kerr, Kerr, and Xu, 2017). Therefore, it is vital to promote creative thinking techniques that can transform stagnation into expansion. According to McFadzean (2000), such methods can be subdivided into paradigm-stretching, paradigm-stretching, and paradigm-breaking approaches that should be familiar to successful entrepreneurs. Hammond, Keeny, and Raiffa (1998) propose that business owners are always to remind themselves about the objectives and examine how the status quo serves them. The team’s creative thinking is sure to provide enough alternative to the status quo decision, and entrepreneurs are to choose the best option without regarding how difficult the decision may be.

On the group level, mature teams also become more stagnant. According to the groupthink theory, such teams start to neglect alternatives and are inclined to stereotype the relevant opponents and out-group members (Janis, 1972). Without interventions, such tendencies are sure to lead to an inevitable decline. The problem can be addressed using six thinking hats techniques introduced by De Bono (1999). This method is a simple parallel thinking process that helps to define six explicit roles of team members. The participants of the decision-making process are offered to “wear” different types of “hats.” This implies that every team member is responsible for a specific part of the process, including calling for facts, optimism, criticism, feelings and intuition, creativity, and process management (De Bono, 1999). This method calls the participants to forget about their inner personal biases and represent specifically assigned biases, which are explicit and easily manageable. Moreover, the group can benefit from any of the lateral thinking techniques developed by De Bono (1977), including idea-generating tools, focus tools, harvest tools, and treatment tools.

Decline and Exit

The decline stage usually comes due to poor decisions during the maturity stage or for environmental reasons, such as drastic changes in the economy, society, or market conditions (Addison&Co, no date). During this stage, the profits and sales fall, and the entrepreneur is concerned with cutting costs and searching for opportunities to revitalize the business (Addison&Co, no date). The major decision-making problem during this stage is to decide whether to exit business and “cash in” all the efforts or seek investment to continue the venture. It is one of the hardest decisions, as the entrepreneur needs to critically evaluate the worth of all the time, effort, and money invested in the business, which may be difficult due to all the biases associated with the matter.

The decision to exit a business is associated with three steps, including business analysis, making the decision, and executing the decision. During the first step, the entrepreneur needs to assess if the business meets the expectations and can yield enough profit to continue operations (Horn, Lovallo, and Viguerie, 2006). This step is associated with estimation and forecasting traps that were discussed in the previous sections and confirmation bias. The confirmation or confirming-evidence trap can be described as “seeking out information that supports the argument and discounting that which does not” (Horn, Lovallo, and Viguerie, 2006, p. 67). Before this stage, the entrepreneur has made the decision not to exit the business many times, and his or her initial intent is usually to preserve the present status quo and reinvest. Therefore, the business owner is likely to disregard the evidence that supports the “exit” decision.

However, even if the entrepreneur is objective enough to accept the information, the sunk-cost fallacy during the second step of exiting the business is likely to impact the decision. The problem is that businesspeople often fail to acknowledge that the majority of effort is an unrecoverable cost that should not be factored into the analysis. As a result, they start to escalate the commitment regardless of the evidence (Horn, Lovallo, and Viguerie, 2006). Entrepreneurs, driven by sunk cost and bias and self-justification intentions, tend to attribute additional resources to business ideas, which raises that commitment (Drummond, and Hodgson, 2011). This leads to a snowball effect making the businessperson become unable to break out of the vicious circle of over-commitment.

The third step of proceeding with exiting the business is affected by anchoring and adjustment bias, which was described in earlier sections of the present paper. In the exit stage, anchoring is often associated with the price offered by the company. One of the most vivid examples of anchoring was demonstrated by the owners of PointCast. In the 1990s, it was a successful business, and Rupert Murdoc’s News Corporation offered $450 million to acquire it (Horn, Lovallo, and Viguerie, 2006). The deal was not finalized, and problems arose in PointCast, as users started to defect to the rivals (Horn, Lovallo, and Viguerie, 2006). However, the company’s executives declined all the acquisition offers, as they were anchored by the first offer without considering the falling revenues and customer losses. As a result, the company was sold to Infogate for $7 million (Horn, Lovallo, and Viguerie, 2006).

All the biases listed above, however, can be avoided through awareness and following simple advice. Horn, Lovallo, and Viguerie (2006) propose hiring independent evaluators and replacing incumbents with new managers to stay objective. As always, it is central to realize that it is difficult to stay objective when a person is forced to give up the work of his or her life for a price that is never enough. However, Hammond, Keeny, and Raiffa (1998) suggest that there is a way to stay objective and avoid escalation of commitment by acknowledging past mistakes. The problem with biases during the exit stage is usually associated with wounded self-esteem. An entrepreneur should remember that even smart choices may lead to adverse outcomes, and it is vital to revise the decisions as soon as they become irrelevant.

Another way of avoiding estimation bias is being aware of the framing trap. The issue is that wording of questions may have a significant influence on the decisions. If the question is framed in terms of losses, people tend to be more conservative, while rephrasing the question in terms of gains, makes people more risk-seeking (Hammond, Keeny, and Raiffa, 1998). Therefore, it is vital to rephrase the question several times and evaluate it from different angles to avoid bias.

Conclusion

Decision-making is a complex process that can be affected by various biases at all the stages of the business lifecycle. In the early stages, entrepreneurs are often affected by estimation and forecasting biases as well as anchoring traps. During the growth stage, the entrepreneurs start feeling the consequences of sunk cost traps, and the maturity stage brings in the problem of status quo bias. Finally, the decline and exit stages are associated with the emergence of commitment escalation and confirmation bias. On the group level, all the stages are affected by groupthink biases and growing polarisation that leads to unbalanced decisions. Even though the present paper formally attributes pitfalls to different stages of the business lifecycle, it is vital to understand that all the described biases can appear and all stages of the development of business with a certain probability. Therefore, entrepreneurs need to be aware of these biases, their consequences, and efficient strategies that help to avoid them.

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