Over the course of the 30 or so essays I’ve written here at the Sunsama blog, a bunch of them have touched on decision-making and strategy formulation.
In Business frameworks can't replace thinking, I proposed that explicit relative values could serve as a way to guide the strategic transition from an Objective to a Key Result in the OKR approach. That approach relies on companies defining its values, perhaps using ‘even over’ statements like these:
Employees' wellbeing even over customer satisfaction.
Customer satisfaction even over profits.
These can guide a front-line manager to take appropriate action when confronted by a customer satisfaction situation, for example.
In How to Make Impossible Decisions, I explored the case of seemingly unresolvable differences of opinion when, for example, three executives have totally incompatible choices in the hiring of a CMO. The first takeaway is that in all instances — and especially the class of impossible decisions — it’s critical to clearly articulate what the decision involves: is the CMO to be tasked with opening new markets, or rolling out new products in existing markets, or opening new operations in Europe? That could change the analysis, and break the stalemate. And perhaps the biggest takeaway: deciding to take the time needed to make a decision is one of the most important decisions of all.
In Building Strategy Via Questions, I explored some of the legwork needed to build good analysis to support strategic decision-making using the Goals, Questions, Metrics model. I quoted Lee Fischman’s characterization:
Why is asking questions so worthwhile? Look at the example above and notice how the Key Results are basically arbitrary. Presumably, some research was done to justify them, but it isn’t obvious. By contrast, GQM questions are intended to be a fairly complete inquiry into the Goal. Because of their completeness, GQM’s questions help you stay focused on what matters.
In Emergent Strategy and Unintended Order, I explored the idea of ‘strategic drift’, as defined by J. P. Castlin:
It stands to reason that the farther we get from the current present, the less likely the new present is to resemble its predecessor. Certainly, the pace of change is rarely constant, but change itself is. As long as we keep doing the same thing, in the same way, strategic drift (the gradual deterioration of relative competitiveness) is all but guaranteed; the speed at which our plan becomes a hindrance to success may vary, but sooner or later, it will.
At the same time, the longer we stick with a plan, the more we are likely to invest in it. […] The more money we lose, the less capable we become of making peace with our losses. Gradually, and then suddenly, we no longer own our strategy - the strategy owns us.
And finally, in the recent Decision-Making: Autonomy versus Speed, I characterized various tactical approaches to deciding who should be involved in decision-making, how it should be conducted, and why. I summarized that with a chart of autonomy versus speed:
Looking back on this exploration of decision-making, I’ve been focused on tactical issues. That’s all well and good, but it’s time we approach decision-making more systematically, and in particular, the cognitive and organizational barriers to the greater process of strategic decision-making. Before any decision is made, data and analysis precede, and judgment must also be applied before the decision is made. I want to step back and examine that greater context, over a series of posts.
If Decision-Making Is So Important, Why Do We Take Shortcuts?
Decision-making is critical to business performance. To go even further, it is an existential requirement. Yet so often things go wrong. Why?
Some problems in strategic decision-making seem obvious when you step back far enough. Consider the 'loss aversion' problem. Operating unit managers are focused on short-term timeframes, and therefore tend to take on only small risks, instead of larger ones that may contribute more to long-term corporate growth. They are more concerned with the possibility of a decrease in status if things go wrong: the potential loss for the manager may be perceived as worse than any potential upside for the company and the manager.
Senior managers, however, must take a portfolio view and therefore must anticipate a portion of projects to fail in the search for a few that will yield big returns. The incentives — and fear of downside risk — between corporate goals and the individual manager’s goals are mismatched.
We will return to this example later in the series once we've established some background, but the important takeaway is this: the economic downside of loss aversion is only one instance of a much larger case of cognitive biases that distort human behavior whenever decision-making is called for. And like so many other aspects of life, avoiding examination of these influences on our behavior leads to big problems.
The Basic Assumption Is Wrong
The basic assumption in business is that strategic decision-making requires three basic elements: fact-gathering and analysis, the insights and judgment of a defined group of people (stakeholders or advisors), and some process -- ranging between very formal to very informal -- for that group to make a decision, reflecting that analysis and judgment.
However, as Dan Lovallo and Olivier Sibony reveal,
Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions
And why is that? The authors go on to draw our attention to the third part: the process. After extensive analysis of 1,048 major decisions over a five-year period, including investments in new products, M&A decisions, and large capital expenditures they determined that
process mattered more than analysis—by a factor of six.
Process, by extension, is also more valuable than the judgment of those involved in the decision-making, too, since flaws in both analysis and judgment are countered by processes designed to do exactly that.
I intend to explore various ways to counter well-understood cognitive and cultural biases that impede good decision-making.
In the following series I will examine these and others:
- Action biases — There is a well-known bias toward action among managers which can lead to accepting overly optimistic analysis and yielding to cultural pressures to make decisions quickly without accurately assessing uncertainties.
- Stability biases — The inertia of the status quo can make it difficult to make changes or undertake novel courses of action. The earlier discussion of loss aversion is one such case, as are anchoring bias (concepts brought up early in planning are given undue weight) and the sunk-cost fallacy (we value what we have invested in more than it is worth).
- Interest biases — Conflicts arise naturally based on where individuals are sited in an organization. Sales may have quite different perspectives on resource allocation than Engineering. Explicitly defining the criteria that should be applied to make a judgment may help.
- Social biases — Social norms can impede making decisions on their merits rather than conforming to social expectations. Dissent must be encouraged, and when absent serves as a warning. This is also an area where diversity plays a large role.
We can’t eliminate these cognitive blinders: they are as deep in our DNA as language and love. However, we must acknowledge their existence, and remain aware that simply knowing about them — while helpful — will not exorcise them.
The only answer — if it can be considered an ‘answer’ — is to develop processes that cover the three stages of strategic decision-making, and carefully relegate control of all stages to process.
Without a bias-countering process, decision-making will be, at the least, suboptimal. And, at worst, flawed strategic decision-making processes can end a company’s future.