Heuristics and Strategy in Business
I read an interesting article today about the difference in strategic, operational and tactical thinking at The Strategy Bridge, you can find the article here. Although most of the discussion was related to developing military leaders that are able to make the transition from thinking tactically to solve limited problems to thinking strategically to solve complex problems the author mentioned the use of Heuristics and how it relates to strategy.
Heuristics is basically how we learn by trial and error. A certain problem arises, we try a solution, it doesn’t work. We then try another solution and it does work, we learn that the particular solution can solve the specific problem. When encountered with a similar problem we will use the same solution. This is what most of us do subconsciously anyways. It is an effective method for solving simple and routine problems.
Let’s use an example. Suppose we have an Accounts Receivable that is close to the 90 day mark. In the past instead of just calling or sending letters to the account holder we send a company representative to the location to discuss any issues with the payment resulting in most accounts being paid. This is a problem, account receivable about to be overdue, and we utilize the method that has solved the problem before to solve the problem again. Heuristics can even tackle complicated. Same concept, almost past due account receivable, but now it’s a business that will not have the funds to pay your account at the 90th day. Well in the past we extended terms for 10 days and charged a 1% interest on the amount, it has worked in the past so we tried it again.
The problem is already evident, heuristics focuses us on the problem at hand. Thinking strategically would require the same business owner to ask more broad and complex questions. Should i change my NET to 30 days instead of 90 days? Will I lose customers if I do so? Is this a business worth keeping as a customer? What about the reputation of my business, do I want to be known as the business that it’s ok to pay late? These are far more complex questions that require us to both gather data (a Customer Lifetime Value analysis perhaps?) and to make tough decisions.
A small business can’t afford to use one or the other method, you have to use both. Yes, day to day you will use heuristics to solve most of your problems just fine. However every now and then, and making it part of a schedule or routine is important, set aside some time to think strategically about where your business is going and what complex problems are you facing. Doing so is essential for your business to survival.