Management Decisions in the Forest Products Industry: Where Good Companies Go Astray

Forest Products October 2008:Forest Products 10/10/08 11:52 AM Page 6
Management Decisions in
the Forest Products Industry:
Where Good Companies Go Astray
By Judd H. Michael and Charles D. Ray
Inthepasttwodecadesalonetheforestproductsindustry elsofsuccess.Thisdichotomyleadsustoconsidertheways
has suffered in the face of what many observers would
in which management decision-making has impacted the
consider a series of self-imposed disasters. Many of these
success of our industry and of individual organizations.
have been at the individual company level, while others have
This article discusses examples of industry actions
affected whole industry segments. Perhaps the best known
that have led to undesirable outcomes, and how manage-
example at the industry level would be the loss of U.S. house-
ment decision-making directly or indirectly caused them.
hold furniture manufacturing capacity to overseas competi-
We will use results from data we have collected from man-
tors (cf. Bumgardner et al. 2004). At the individual company
agers over the years, plus anecdotal or case study evi-
level, the impacts have ranged from the closure of many
dence from our own experiences working with companies
smaller sawmills to Federal antitrust suits against the large,
in various segments of the wood industry. Unless citations
integrated forest products corporations.
are provided, the opinions expressed are our own, drawn
It is our contention that decisions made, or not made,
from conversations, interviews, or other contacts with
by senior managers within the forest products industry
managers of those companies.
have arguably caused much of the misfortune that has
Our primary goal with this article is to illustrate exam-
beset our producers. Leadership at the executive level is
ples of how decision-making can cause negative conse-
critical for the success of any organization (Hambrick and
quences and encourage industry leaders to reconsider
Mason 1984, Finkelstein and Hambrick 1996), and strong
how decision-making impacts their businesses. In addi-
leaders are especially needed when a firm or industry faces
tion, it may prove valuable for academics to understand
increasing competition or uncertain economic times. Such a
that no matter how outstanding the ideas we provide
situation has characterized the U.S. wood products indus-
industry, there may be cognitive reasons why some man-
try for a number of years (Buehlmann et al. 2003), and yet
agers will not put them to use. As the broad forest prod-
evidence indicates that many of our executives are not mak-
ucts industry faces a multitude of challenges to its contin-
ing decisions that will effectively lead their organizations.
ued survival, there has perhaps never been a more critical
Strategic leadership for most wood product firms
time for industry leaders to work on making better deci-
begins with the owner, president, or chief executive officer.
sions. As we will see, this can have implications for every-
Many of these leaders have successfully guided their compa-
thing from decisions to build new plants to buying new
nies through the multitude of competitive contingencies the
equipment to which markets are entered.
market has brought to bear, thereby resulting in solid per-
formance, growth, and profitability despite the many chal-
Management functions
lenges (e.g., Seeger and Ulmer, 2002). However, it should also
Business school students taking a Management 101
be clear that many firms have not been led to the same lev-
class are taught that the core managerial functions include
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planning, organizing, leading, and controlling (Hellriegel,
be very good at making decisions, or at the very least can’t
Jackson and Slocum 1999). And at the heart of these roles
afford to make a lot of bad decisions. But unfortunately we
is making decisions (Simon 1987). The importance of deci-
see case after case of management decisions that have cost
sion-making is even clearer when we hear many experts
wood manufacturers untold dollars. We next discuss just a
say that above all else, managers are made or broken by
few of these cases, all of which were caused in whole or
the quality of their decisions.
part by poor judgment and decision-making.
Lots of low- and mid-level employees in our industries
make decisions on a daily basis. People like lumber graders,
Where good companies have gone astray: examples
headrig operators, and drivers make hundreds or even
of negative outcomes
thousands of basic decisions a day, all of which can have
No fewer than eight major wood products companies
impacts on profitability. For example, one study found that
have produced hardboard or OSB siding that eventually
approximately 75 percent of decisions made by graders in a
subjected them to class-action lawsuits. The individual
rough mill setting were erroneous in at least one way
suits that were litigated, in some cases for more than a
(Buehlmann and Thomas 2002). Such decisions impact a
decade, cost the shareholders hundreds of millions of dol-
mill’s bottom line via a substantial reduction in yields.
lars in settlements, several hundred millions more in legal
However, it is the decisions made by managers that can
costs, and damaged customer perception of the compa-
directly impact the success and competitiveness of a wood
nies involved.
producer. In fact, past research suggests that decisions
One of these eight, Louisiana-Pacific (LP), had more
made by a firm’s top management team can account for
than its share of problems in the 1990s. Two of its man-
nearly half of a company’s performance (Finkelstein and
agers were indicted for tampering with emissions moni-
Hambrick 1996). But are the key decisions made by industry
tors, increasing production at night (to hide the smoke)
leaders always clear-cut and simple? And do they always
and violating the Clean Air Act at its Olanthe, Colorado,
result in enhanced productivity and profitability? Of course
OSB plant (Siegal 1998). They also were accused of deceiv-
not, and this is because many of a company’s most impor-
ing inspectors about quality issues and substituting non-
tant decisions are fraught with uncertainty and subject to
standard production as mill-run production for the sake of
influence, emotion, and bias. It is the effects of bias that can
demonstrating minimum strength properties. The plant
cause managers to make some of their biggest mistakes, so
manager spent nine months in jail for his role in the viola-
it is therefore important to understand how bias can impact
tions, and the company was fined $37 million. Ultimately,
decisions made by managers in the wood products industry.
the CEO and his two top lieutenants were ousted by the
While decision-making is arguably the most important
board of directors (St. Clair and Cockburn 1995) as class-
aspect of being a senior manager (Garvin and Roberto
action claims against LP panel quality mounted1.
2001), this is an area in which few managers receive formal
As OSB markets were taking off in the early 1990s, LP
training. Obviously, lots of wood industry employees are
held an apparently dominating market position in that
trained to make technical or quantitative decisions, but
product. Corporate leaders of several competing forest
not many managers are taught about ways to optimize
products companies chose not to get into the OSB business
individual and group decision-making. One of our chal-
at that time in spite of advice from their mid-level technical
lenges is therefore to help managers in the wood products
and sales personnel, as well as predictions from govern-
industry make better decisions in light of the inherent
ment and academics (e.g., Montrey and Utterback 1990).
biases and ambiguity that interact with designs of their
Later reversals of course caused those companies to be
organizational systems.
very late to the party; they eventually made half-hearted
investments in sub-optimal competitive or alternative
Why management decisions matter
operations that did not take advantage of the declining
The so-called upper echelons theory in management
costs of OSB production (Spelter 1996). They never caught
science was developed by Hambrick and Mason (1984)
up to LP in OSB production and suffered financially from a
based on the assumption that executives do matter to
too-heavy reliance on low-margin softwood plywood prod-
their companies. The upper echelons perspective is
ucts when business in the higher-margin OSB business was
grounded in strategic choice — emphasizing that a manag-
booming (Skog et al. 1995, cf. Spelter 1996 for a chronolog-
er’s strategic decision-making influences company per-
ical listing of panel mills by ownership).
formance. Studies have found that executives can impact
Broad-based evidence of negative outcomes from poor
from 5 to 44 percent of the variance in firm performance
decision-making can also be seen in the number of wood-
(Finkelstein and Hambrick 1996, Weiner and Mahoney
based companies that go out of business each year. Some
1981). Further, a significant number of organizational theo-
research suggests, for example, that at least 10 percent of
rists have historically argued that top executives are
softwood lumber companies go out of business each year
responsible for making the decisions that have consider-
(Spelter 2002), with even higher figures for primary produc-
able influence on organizational performance and econom-
ers in the hardwood industry. While it might be easy to
ic sustainability (Barnard 1968, Child 1972, Cyert and
blame economic conditions, global competition, or govern-
March 1963, March and Simon 1958). In addition, the lead-
ment regulations for our business failures, experts believe
ership literature is replete with findings of how leaders sig-
nificantly impact the outcomes of organizations both good
1 For an overview of lawsuits against LP see Chapter 13 in
and bad (e.g., House, Spangler, and Woycke 1991).
Hensler et al. (2000) or U.S. v. Louisiana-Pacific Corporation,
This implies that a firm’s management team had better
D.Colo.
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that the more likely cause is simply flawed decision-making
become so overconfident during the good times that they
by managers (Lovallo and Kahneman, 2003).
discount the signs pointing toward a change in conditions.
A prime example is that of Toll Brothers, one of the
Where management
nation’s largest high-end homebuilders.
Chief Executive
decision-making goes wrong
Officer Bob Toll has been noted for his ability to “read” the
market (Rice 2008), but his failure to accurately foresee
If many of our business failures are caused by faulty
the housing crisis starting in 2007 has cost his company
decision-making, then it would seem important to have a
well over a billion dollars.
better understanding of how and why managerial decision-
One of the exercises we’ve done with several hundred
making can go wrong. The following section discusses
managers from various parts of the wood industry reveals
some of the main areas that we believe have the most
evidence of this important bias. The exercise requires par-
impact in the wood products industry. As we illustrate, the
ticipants to rate their abilities relative to the other man-
effects of bias, coupled with entrenched organizational
agers in the room; examples would include abilities relat-
systems, are often the key factor causing managers to
ed to bargaining, driving, and even honesty. Participants
make poor decisions.
are told to rate themselves at 100 percent if they are the
best in the room and zero if everyone else is better than
Bias in judgment: Overconfidence
they. Even though the average should come out to 50 per-
Perhaps the most prevalent bias we see has been
cent, we regularly see averages well into the 80 percent
termed “management optimism and overconfidence.” This
range (see Table 1).
is a dangerous bias that can occur when managers become
These results may seem innocuous enough, and yet
so overconfident that the possibility of failure gets discount-
they reflect a common bias that can have potentially seri-
ed and they end up making poor strategic decisions. An
ous consequences for a mill. The bias is related to over-
example that many readers may remember is when Daimler-
confidence in one’s abilities relative to others, and often
Benz decided to buy Chrysler. The CEO and members of his
leads managers (especially younger males) to assume they
upper management team had become so successful at run-
will be able to avoid or easily overcome potential prob-
ning their own company that they assumed they could man-
lems when executing a project. If you’ve ever heard night-
age the merged DaimlerChrysler with the same success.
mare stories about a green-field mill coming in 50 percent
Even though many of Daimler-Benz’s analysts and consult-
over budget, or a sales forecast for a new territory that
ants warned that it was a mistake to purchase Chrysler, the
was 30 percent too high, then you’ve seen what can hap-
CEO went ahead with the deal (Garvin and Roberto 2001).
pen with unwarranted overconfidence.
Today the Daimler-Chrysler marriage is widely seen as a
A related exercise is one in which participants are
strategic disaster that cost the firm’s stockholders dearly
asked to provide their best guesses for six different quan-
(Nguyen and Kleiner 2003, Waller 2001).
tities. Not only do they give their best guess of the actual
Similar examples of overconfidence are seen in our
amount, but they also are allowed to give a range within
industry during periods of economic downturn such as
which the actual amount will fall. The trick is that the man-
the one we are currently encountering.
Leaders can
agers are told to fill in the range so that they have 98 per-
cent confidence that it will contain the actual figure.
Table 1. — Illustration of managers’ overconfidence
in relative competencies.
Figure 1 shows how this works, including six unknown
quantities that have been used in the past.
Rating of your Relative
In a typical class of managers, at least 90 percent of
Ability (0–100)
(averages)
them will get the first amount correct (i.e., provide a range
Your bargaining abilities
60.5
that contains the actual age of Coach Joe Paterno). But,
the amounts in question have purposely been designed so
Your decision making abilities
69.8
that each one gets a bit harder than the previous quantity.
The trend we always see is that the percentage of people
Your intelligence
65.9
whose range contains the actual amount gets steadily
Your honesty
84.4
smaller from the first to the last amount. Thus, managers
continue to provide narrow ranges even though the exer-
Your physical attractiveness
60.6
cise allows them the opportunity to input very large inter-
How much money you will
vals. The trend is important because it illustrates how
make in your lifetime
58.3
managers’ estimates can be most incorrect when tasked
with guessing an amount that is far outside their realm of
Your driving ability
73.8
knowledge. While managers are generally accurate with
familiar quantities, the danger lies in the manager who is
Your mental stability
74.9
asked to provide an answer to a question with which he or
Your future skill as a manager
she is very unfamiliar.
5 years from now
71.4
It is noteworthy that we did not make up these two
examples of overconfidence in managers. Variations on
Your problem solving abilities
70.4
these exercises, and others like them, have been used by
industrial psychologists for decades to illustrate to man-
* averages from more than 250 wood industry managers
agers that they too are subject to biases stemming from
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overconfidence (see Bazerman (1998) for an excellent
suppliers against the manufacturer in future years. We
review). We provide these examples to illustrate from a
believe this has become a fairly common development in
“laboratory” type setting what actually happens in real
the wood industry, where one agreement between large
life. Overconfidence and unwarranted optimism are such
corporations can negatively influence the market and com-
significant issues that we will see their effects intertwined
petition for years.
throughout much of the following discussion.
Escalation of commitment
Chasing unprofitable customers
Another costly but common bias is called escalation of
Unfortunately, our industry is often characterized by
commitment, and occurs when a company’s management
a bias toward chasing, and then keeping, bad customers
continues to commit resources to a failing cause even when
even though the company would be better off if they were
there is a slim hope that the situation will dramatically
“fired.” A prime example of this is when LP signed an
improve. Decision-makers close to a given problem often
exclusive supply contract for softwood studs with a
become so biased that they continue a commitment to a
national home center chain in the late 90s. At the time it
previous decision even though a rational decision-maker
was hailed as a major marketing triumph for LP. Just thir-
would just pull the plug. We’ve worked with a variety of pri-
ty months later, however, that contract had become a huge
mary and secondary wood producers who have fallen into
anchor pulling the business slowly, but surely, under and
this trap, with the situations ranging from acquiring anoth-
eventually encouraging LP to divest itself of its solid lum-
er company to developing new products.
ber business (cf. SEC 2002).
A typical example occurred during a recent project
This is a good example of what is known as “the win-
with an owner of a growing unfinished furniture manufac-
ner’s curse” (Bazerman 2004) and is another issue that
turing company in Pennsylvania. The owner had grown his
often causes negative consequences for our producers.
business over a decade to the point that he had gone from
Even though the lumber producer “won” the contract,
five to more than 150 production employees. He had
they soon found out that it was not to be such a great deal
recently expanded his production facility to the limits of
after all. This was because the customer had come to
his acreage in an industrial park, and decided to buy
know so much about the supplier’s mills and costs that
another plot of land next to his plant. He was so certain of
every last cent of profit had been squeezed from the lum-
an increase in sales that he paid for a concrete pad to be
ber mills, and business transaction costs had made that
built on his new lot. About this time, however, the U.S.
customer an over-weighted loss leader for the producer. In
economy started to slow and demand for unfinished furni-
the meantime, the leverage gained by the distributor
ture quickly leveled off. This presented the owner with a
played a significant role in suppressing lumber prices in
key decision: one option was to go forward with plans to
that particular product category well beyond the term of
the agreement with the over-zealous lumber company.
Figure 1. — Sample confidence level assessment tool.
Industry’s zeal for pursuing customers can also lead
Confidence Level Problem:
to negative consequences when leaders focus more on
Listed below are 6 items with uncertain quantities.
sales volume instead of margins and profitability. For
1. Starting with #1, write down your best estimate
example, in wood commodities markets the push from cor-
of the true amount.
porate headquarters will often be to increase market
2. Then write in a lower and upper bound around
share. But when managers are rewarded based on increas-
your estimate, such that you are 98% confident
es in market share, they will often enter into sales arrange-
that your range surrounds the actual amount.
ments “with cognitive blinders on” and do not consider
the profitability of the new customers needed to gain mar-
Your estimate
Range
ket share. This is perhaps one of the reasons that increas-
of actual
es in market share do not necessarily lead to increased
Lower
Upper
number
profitability (Szymanski et al. 1993). These blinders can
bound
bound
lead sales management to overlook important contractual
1. Joe Paterno’s age
details that unknowingly put them in a position of weak-
ness vis-à-vis their partners. They then provide company
2. Total U.S. population
leadership with an overly rosy view of the distribution
(2000)
partnership and hence an unwarranted confidence that
3. Number of new wood
the contract (and the increase in market share) will pro-
pallets produced each
vide the predicted profits.
year in US
An additional problem develops since this bias often
4. Number of (single
compromises the control of information that the cus-
family) housing starts
tomers and/or suppliers can then use against both their
in 2006 (U.S.)
new “partner” (i.e., the lumber producer) as well as other
5. Wal-Mart 2007 sales ($)
companies in the industry. Signing loss-leader contracts,
granting volume discounts, and sharing proprietary com-
6. How many acres of
timberland are there in
pany data (e.g., cost data), may open the door to big
the U.S. ?
accounts (and big bonuses for individual managers), but it
usually leads to powerful leverage for the customers and
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known as a “sunk cost bias.” Unfortunately, this combination
is very prevalent in many parts of the wood industry and has
cost companies in many ways. Perhaps the root cause with
our managers is that they do not effectively discount (i.e.,
ignore) funds already spent when deciding whether addition-
al funds should be allocated to a project.
We
saw
another
example
of
this
recently
at
Pennsylvania House Furniture, a major brand-name inte-
grated furniture company and subsidiary of La-Z-Boy, Inc.
The company’s flagship operation in Pennsylvania was a
century old, and although they prided themselves on their
attention to the brand and recent efforts to upgrade the
production facility, it had become a nightmare of conflict-
ing engineering design and management philosophies. Our
early analyses of the company revealed a critical need to
down-size and sub-contract some of its operation, primari-
ly the lumber procurement and drying portion of the mill.
Yet, the leadership maintained that lumber drying was a
core competency, and that their accounting system
proved that by drying their own lumber they were mini-
mizing their raw material cost to the dimension mill and
furniture assembly plants.
A bias came into play because they refused to consider
how much of the company’s capital the drying operation
was tying up as they continuously carried millions of board
feet of dry and green lumber inventory. Moreover, a few
managers could not get past the idea that they had just
invested heavily in three new dry kilns and gone to great
lengths to justify their installation. Leadership also failed to
consider how the “allocation” of their raw material and dry-
ing costs over their production, as determined in their
accounting system, was biased toward in-house production
It is the effects of
and against out-sourcing, even though outsourcing prom-
ised great opportunities to “lean” their operation and create
a company much more responsive to the marketplace.
bias that can cause
Ultimately, their slow market response and inefficient sys-
tem
caused
La-Z-Boy
management
to
close
the
Pennsylvania House facility in Pennsylvania and move all
managers to make
the production of the famous old brand name to China. In
more academic terms, managers at various levels of this
some of their
company allocated resources in a manner that justified
their previous commitments, regardless of whether or not
those initial commitments remained valid (Bazerman 1998).
biggest mistakes
Organizational silos: Failure to share information
and data in decision-making
erect the new building on the pad that he had just paid for.
Failure to share key information within an organiza-
Or, he could instead put his expansion plans on indefinite
tion can be seen as the cause of many unfortunate deci-
hold. As with many managers, the owner approached this
sions, the results of which range from costly to catastroph-
decision by strongly considering the several hundred
ic. One case with disastrous consequences was detailed
thousand dollars he had invested in land and concrete. His
by the 9/11 Commission (Kean and Hamilton, 2004). In
thought process, as he described it, went something like
hindsight, it became quite clear that the U.S. government
this: “I have just invested considerable funds, and I cannot
had more than sufficient information that could have not
afford to waste that money by not going forward with
only stopped, but also forecast the terrorist attacks. The
building plans. Therefore, I will spend an extra quarter-mil-
problem, of course, was sharing the available information
lion dollars for the new building and hope that economic
between such agencies as the CIA, FBI, FAA, etc. (e.g., see
conditions turn around.”
Bazerman and Chugh 2006).
Several advisors to the owner saw that his commitment
Organizations in the wood products industry have
to the project had the potential to hurt the company finan-
also endured the consequences of not effectively sharing
cially, but the owner’s decision-making was biased by a com-
information internally. As noted above, leadership at a
bination of his escalated commitment and what is commonly
major OSB producer rushed to market with a defective
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panel product that had not been thoroughly tested and
optimism” (Lovallo and Kahneman 2003). Managers are
cost the company millions in damages. The disaster result-
too often guilty of accentuating the positive aspects, to
ed in part because the organizational system was designed
themselves and to superiors, of a project or contract while
in such a way that “silos” of knowledge existed internally
ignoring data that might disconfirm their hypotheses. This
so that critical technical information did not always flow
actual case study ended with predictable results. The proj-
upward to the decision-makers. Silos in organizations exist
ect costs were trimmed, though not by the amount neces-
when one function or department does not effectively
sary to offset the cost increases; the resulting technical
share information and/or data with others in the company.
compromises reduced the effectiveness of the engineering
Past research suggests that these silos can drastically
solution, led to more design compromises, and increased
impact the sharing of information within an organization
maintenance costs for the machine at start-up. Actual
(e.g., Barua et al. 2007).
start-up of the machine ran nearly a year longer than
The shining hope for organizational advancement tout-
expected because of these engineering issues and vendor
ed in the 1990s was that the computer-enabled “informa-
re-negotiations. Meanwhile, the market for the product
tion age” would open up the carefully controlled channels
was indeed impacted by the new overseas capacity; by the
of communication so all employees could utilize the entire
time the company reached the market with the new paper
base of information to their fullest capability. In some
line, prices were far below anything that would sustain a
respects, this has happened; Internet access has given indi-
reasonable pay-back for the company. The project wal-
viduals the ability to strengthen and expand their technical
lowed in red ink for years, and the plant manager of the
knowledge bases from resources outside the organization.
mill was shown the door by the board of directors soon
And within organizations, internal communications depart-
after the start-up of the machine.
ments have created organizational news forums and access
This case illustrates many of the classical managerial
to some databases to which most individuals did not have
biases mentioned in this paper. Company management
prior access. So, on average, companies have more fully
was buoyed by recent high profits and had grown overcon-
informed and developed employees.
fident in its ability and intuition. As the idea gathered
But the actual fulfillment of organizational advance-
momentum and the project designs were finalized, man-
ment has not occurred; the promised improvement of data
agement became over-committed to the one particular
quality in organizational decision-making has not been
path forward and followed it to its disastrous end. The
realized. In reality, the additional information that has
engineers were biased due to high internal pressures
been made available is the equivalent of assigning more
toward the selection of vendor technology that, while
capacity to non-constraining resources in the organiza-
higher in cost, was preferred by upper management as
tional
optimization
model.
The
true
constraining
“state-of-the-art” technology and therefore had better
resources, the power positions in the organization, still
chance of sign-off by the management team. In their rush
carefully control access to mission-critical information.
to finish their project, management’s attention had been
And the managers who control this mission-critical infor-
temporarily diverted from focusing on the impact of
mation tend to be much more internally focused than
increasing competition; in doing so, they had both active-
employees farther out on the periphery of the organiza-
ly and passively created a barrier to information that
tion. The result is that the information that is actually
resulted in a biased selection of available information.
processed in most high-level decision-making processes
suffers from both this internal focus bias as well as a bias
Bias in project selection
resulting from filtering out the negative aspects of any
Very often, managers fall prey to a selection bias when
project that these key managers tend to be favoring.
considering alternatives for a project. These biases form
These biases often play out as critical management
very early in an individual’s professional development and
decisions are in their last stages of sign-off, as we see in this
take many forms. They are manifested as a bias to opt for
example. Sales personnel for a major paper company that
“cutting-edge” technology that leads (unexpectedly) to
had nearly two years invested in the decision to build a
“bleeding-edge” implementations; or the opposite, a bias
new paper machine became aware that prices in the target-
toward “tried-and-true” technology that may have been
ed product line were softening and that major foreign com-
passed by recent technological developments, resulting in
petitors were moving forward with more capacity in the
the implementation of a “new” operation that is “old” and
same product overseas, where production costs were like-
uncompetitive from its start-up.
ly to be lower. However, internal constraints and filters on
Selection bias can also manifest itself in strategic con-
this information, even though it was widely known in the
texts; most common in large corporations is the bias for
industry, suppressed the consideration of these new devel-
building green-field operations (which add more capacity
opments and allowed the project to go forward. At the
to the market) rather than investing in buying out compet-
same time, engineers on the project had received revised
ing operations (which do not). The opposite of this is
cost estimates that increased the expected cost by nearly
another common bias, one for buying old, dilapidated
$200 million. This information also was suppressed as top
operations that management optimistically assumes can
management presented the “final” proposal to the board of
be made more profitable under their better management,
directors, in the belief that these cost increases might be
instead of identifying a better market opportunity and
compensated for by trimming other aspects of the project.
building a new facility designed specifically for that oppor-
This unfortunate, but common, situation in the wood
tunity. These strategic selection biases often occur differ-
industry mirrors what experts have called “delusional
entially in large corporations, with one business unit’s
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rare example of how we are often stuck following the status
quo, but it does illustrate the mindset of some industry
leaders that have a hard time moving forward.
How managers can improve their
decision-making
While decision-making is the most important task for
managers and executives, it is also known as being the
“toughest and riskiest” (Hammond et al. 2006 (p. 1)). This
implies that understanding how to make better decisions
would benefit any manager. The following section briefly
describes a few of the ways tips and techniques that
should be helpful to all wood industry managers.
Luckily, there are several ways to help avoid biases
and possibly improve the decision-making that occurs in
Managers who understand
your operations. The first step is to promote the possible
effects of bias and get all your management team to recog-
cognitive biases can
nize the biases that may be impacting their judgment (and
that of their subordinates, customers, etc.). Managers who
better evaluate
understand cognitive biases can better evaluate proposi-
tions made by subordinates, business partners, or even
propositions made by
vendors. Next, managers must take that knowledge and
learn to “de-bias” their judgment. Although this is a some-
subordinates, business
what complicated process, it has the potential to have
positive impacts throughout your operations.
partners, or even vendors.
One potentially problematic circumstance that lead-
ers must be wary of is when people are put in new situa-
tions. For example, we often promote from within and then
high-profile manager opting for high-tech green-field
expect the managers to know all there is to know about
investments against all caution and another business
their new position. They may be asked to give a sales fore-
unit’s head opting for constricting caution in investment to
cast for their new territory, but overconfidence or a fear of
the point of missing key opportunities and saddling the
admitting a weakness pushes them into providing a figure
company with bloated, inefficient operations that their
that is not based on fact or experience. This suggests that
competitors were happy to unload. Therefore, it is not
leaders at the very least be cautious of decisions made by
uncommon to see the same corporation with one or more
younger employees who are put into unfamiliar situations.
over-extended business units saddled with one or more
However, leaders must not forget that experienced
under-performing business units. In fact, this situation is
common precisely because the managers’ biases are com-
managers can also suffer from biases. While one might
pounded by their dislike for their internal competitors and
think that the more experience a manager has the better
their resolve in proving the others’ tactics wrong.
they should be at making good decisions, this is not nec-
Selection bias can almost always be countered by due
essarily the case. In fact, we often see that senior man-
diligence in project analysis. Weaknesses in assumptions
agers are more likely to make poor decisions due in part to
can be tested and highlighted by operations research (OR)
the biases that build during long and generally successful
techniques, such as simulation modeling and linear pro-
careers. A past track record of success is often the cause
gramming to alternative sets of assumptions under different
of disastrous decisions.
levels of certainty. However, these skill sets are not com-
A related weakness comes when we benchmark best
monly employed in the wood products industries; even
practices. Many of our trade associations, for example, con-
when they are, the results presented by the analysts are
duct quarterly tours of mills that are having great success
often discounted by the overconfidence of upper manage-
with some new technology. The danger producers face then
ment in its own intuition, as mentioned earlier in the paper.
is that they only get to see the mills that are having great
success with that new technology! Producers might learn
Still doing things the same old way
much more by “benchmarking failure,” or looking for those
One last example illustrates the mountains that we
companies that have not had success trying some new
sometimes must climb when attempting to assist some
piece of equipment or entering some new market.
leaders in our industry. A few years ago at a hardwood lum-
Managers are advised to remember that nonrational
ber trade association meeting a speaker was promoting
escalation of commitment causes many poor decisions and
exporting to Europe, but met resistance from a few of the
to learn to watch for it and avoid it. Experts believe that if
old-timers in the audience. One of the responses explaining
managers want to consistently make better decisions then
why the lumbermen weren’t interested in exporting went
they must learn to distinguish between situations where
something like this, “I remember World War II, and I will
continued persistence will bring positive returns and those
never do business with the Germans.” Obviously, this is a
where persistence may have big costs (Bazerman 1998).
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This may take a change in organizational culture, but pro-
cedural changes such as removing initial decision-makers
from subsequent decisions can help as well. Another key to
avoiding escalating commitment to projects is to remem-
ber that sunk costs cannot be recovered and thus should
not be included in forward decision-making.
Another core concept for making better decisions is
the ability to use data and information more effectively.
The first aspect of information use is to effectively utilize
information resources that currently exist within an organ-
ization. This may require breaking down internal silos that
prevent data and information from reaching those who
need it to make a key decision. Organizations might also
consider a move toward more evidence-based manage-
ment (Pfeffer and Sutton 2006). Evidence-based manage-
A first step is to
ment has migrated from helping medical professionals
make better decisions into the management realm and
acknowledge...that the
shows real promise for helping get the right information
into the right places to help make better decisions.
natural tendency of
Finally, the organizational systems within many forest
products manufacturers could be designed better to facil-
managers is to be
itate effective decision-making. This could include chang-
ing incentive systems that push managers to continue
overoptimistic and
commitments to previous decisions instead of allowing
sunk costs to be ignored. Incentive systems are often at
overconfident in
fault for discouraging cooperation between functions and
units, which is a fundamental cause of informational silos.
their abilities.
Often, it will take an outside view from someone unrelated
to the organization to get a really good look at entrenched
include aspects ranging from corporate culture to incen-
systems, or to provide an unbiased opinion of a critical
tive programs to data warehousing. Oftentimes, it takes a
decision that is about to be made.
change of leadership at the top of the company to make a
real difference. Louisiana-Pacific is a good example of a
Conclusions
corporation where a new top management team made sig-
Managerial decision-making has a significant impact
nificant, positive changes in an effort to improve long-term
on nearly all aspects of our industry, and in challenging
competitiveness. Overhauling organizational systems or
economic conditions it is even more critical that industry
replacing upper managers are not easy choices to make,
leaders make the best decisions possible. We have pre-
but we suggest that they may be the only way for some
sented just a few illustrations of how decisions have had
wood producers to survive.
negative impacts on wood producers, and most readers
As practicing academics, we would humbly submit
will have their own examples of poor decision-making
that our colleagues in the various forest products pro-
leading to negative consequences.
grams in North America and beyond have developed a
Industry leaders need to pay close attention to their
range of solutions that could have had a much greater pos-
own biases, as well as those of their subordinates and their
itive impact on the industries we serve. From technologi-
trading partners, and understand how they can impact key
cal innovations (e.g., Hunt 1975, Sliker and Suchsland 1982
decisions and outcomes. A first step is to acknowledge that
Youngquist et al. 1992) to operations management (e.g.,
biases exist, and that the natural tendency for managers is
Young et al. 2007) to business strategies (e.g., Schuler and
to be overoptimistic and overconfident in their abilities. It
Buehlmann 2003), our colleagues have provided industry
would behoove us all to remember that in real life, a man-
leaders with a wide variety of tools capable of improving
ager’s knowledge is always incomplete. Time and cost con-
the competitiveness and profitability of their operations.
straints limit the quantity and quality of info available to
Unfortunately, we must face the fact that no matter
decision-makers, and this can have a direct impact on a
how good our ideas, many companies in the industry will
course of action. Human needs and goals will change, and
not utilize these solutions. We submit that in many
will often override what is best for the company. But with
instances clientele have not utilized our proposed solu-
this in mind, leaders can then work to avoid situations
tions due to the manner in which decisions are made by
where biased decision-making may negatively impact their
small groups and individual managers. Thus, it may be
organization. It should be clear that the way a management
helpful to acknowledge that such factors as cognitive bias-
team makes decisions can have a significant impact on the
es and organizational systems are in many cases the root
firm’s operations and profitability.
cause of why our ideas are not adopted. If, as researchers
Beyond personal biases, many wood manufacturers
and as a Society, our goal is to strengthen the forest prod-
have a great need to change various parts of their systems
ucts industry, then we should try to fully understand the
in order to facilitate better decision-making. This could
forces that prevent us from achieving our potential impact.
FOREST PRODUCTS JOURNAL
Vol. 58, No. 10
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