Archive for the ‘Decision Making’ Tag

Why do smart executives make bad decisions?

Why do seemingly intelligent and well-meaning executives make bad business decisions?

As consultants, it’s a question that organizations task us with answering, often through postmortem reviews of failed strategic initiatives. The idea is to develop a better understanding of how and why pivotal (and ultimately poor) choices were made in hopes of not repeating the mistakes.

We look at the analysis undertaken, the managerial deliberation and how the final decisions were made. In each case, we discovered that the root cause of the bad choice(s) was not the decision-makers themselves — i.e. stupidity on the part of management — but rather a dysfunctional process for making decisions.

Optimizing the decision-making process can go a long way to improving the level of analysis, managerial buy-in and the quality of the decision. And — perhaps most importantly — it could spare your organization from being responsible for the next Edsel or New Coke.

Worst practices

Rigid silos
Whether purposefully, a product of geography or a matter of culture, employees in many organizations are “siloed” in discrete units or departments. Rigid silos restrict the flow of ideas, hampering the collaborative process required for developing sound analysis and making informed decisions.

Executives who possess a siloed worldview — i.e. “empire builders” — can be particularly toxic. Unlike lower-level managers, these individuals have the power to inhibit the allocation of necessary resources and the development and implementation of strategy that serves the interests of the larger organization.

Excessive politics
Politicking is inevitable when any group is gathered to make an important decision. The trouble occurs when politicking gets out of control and supersedes sound logic. This sort of dysfunction breeds and emboldens bias and ago, which can hijack the process and lead to lousy decision-making.

Common examples of excessive politicking include: prioritizing departmental or career goals at the expense of corporate ones; keeping key stakeholders in the dark through the widespread use of back-channel communications; and overemphasizing consensus building or “what will fly” over what makes the most sense.

Muddled processes
Most large organizations assert the importance of strategic problem solving and retain scores of managers who possess this skill. However, many of these firms fail to create and follow the right practices for guiding and empowering these individuals to reach their full potential.

The process — if it even exists — often follows inadequate preparatory work and is too brief, under-resourced and devoid of key stakeholders. Worse, the individuals who are in the room often possess a shared analytical framework thus and lack the skills, expertise and vision required for distinguishing between a good idea and a bad one.

Best practices

There is no silver bullet for creating and sustaining an effective decision-making process. Every company and situation is unique. However, getting the organizational fundamentals right can go a long way toward mitigating and eliminating many of the aforementioned issues. Generally speaking, best practices include:

  • Developing and implementing a systematic decision-making methodology and process
  • Encouraging open and frank discussions about all options, assumptions and scenarios
  • Providing access to high-quality and actionable data
  • Using practical and coherent criteria for evaluating decisions
  • Having engaged and impartial leaders overseeing the process

For more information on our services and work please visit Quanta Consulting Inc.  Follow me on Twitter @MitchellOsak or connect through email at mosak@quantaconsulting.com

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The crowd makes the decision

Watch out Howard Stern: your role as judge on America’s Got Talent could be in jeopardy, thanks to Crowdsourcing — a proven, web-powered way to raise money and troubleshoot problems. And, this may be just the beginning. Research published in the K@W newsletter (a Wharton Business School publication) shows organizations can now gain significant value by leveraging the crowd to make important decisions on which projects to focus on or which creative execution to choose.

Crowdsourcing is the online process of obtaining needed services, ideas, or funding by soliciting contributions from a large group of people outside of an organization or its supplier network. Raising money, in particular, is very popular. One of its leading platforms, Kickstarter has raised more than $1-billion in pledges for 135,000 projects from 5.7 million donors, a Wikipedia posting notes. Offering an alternative to bank or venture financing is one thing, but can the wisdom of the crowd compete with experts to decide which projects to pursue or talent to back?

New research Professors Ethan Mollick (Wharton) and Ramana Nanda (Harvard) looked at this question by analyzing how theatre projects get funded, and later performed in market. Studying these types of decisions is a good test of crowdsourcing’s potential because they require both a subjective (i.e. artistic taste) and objective assessment (i.e. determine the long-run success of the project). Importantly, the U.S. arts world is a good test bed for evaluating crowdsourcing decisions. Since 2012, more money has gone to the arts through crowdfunding than the government-run National Endowment of the Arts.

The researchers compared the funding decisions by theatre experts and the crowd on six projects. The experts were experienced judges who worked for the NEA. The crowd was participants in a Kickstarter campaign. The findings were thought-provoking. The decisions of the experts and crowd were very similar with a 57% to 62% concurrence on the choices. Yet, decision alignment does not automatically translate into good decisions.

To measure the quality of the choices, the researchers also analyzed the economic impact of the successful theater projects. They found that many of them evolved from a one-night only event into recurring performances that, in some cases, provided dozens of employment opportunities not to mention long-term revenues.

Implications for companies Crowdsourcing decision-making is an appealing tack for many companies. Many decisions, especially ones with subjective criteria, can benefit from multiple lenses that remove the bias of internal experts (e.g., the ‘not invented here’ syndrome), or produce additional opinions when expertise is lacking. Tapping the crowd can be faster and less expensive than finding subject matter experts or using consultants. Finally, relying on the crowd could avoid the internal politicking that comes with high-stakes choices that lack objective data.

A variety of decisions can be made by the crowd. For example, marketers can use it to help them choose the brand messages or advertising creative that best resonates with their target audience. Furthermore, venture capitalists can leverage a community of technologists or consumers to help them decide which startups to fund. Importantly, tapping the crowd does not negate the importance of internal experts, who can still be used to make sure the crowd’s choice passes the ‘common sense test’ and that decisions incorporate all the data.

Tapping an external community, however, will not be ideal in every situation. Many leaders will be unwilling to outsource major decisions given their egos or risk aversion. Furthermore, using the crowd for smaller decisions like picking advertising creative could be impractical and demotivating to staff. Finally, leveraging the crowd may lead to poor results if not properly executed.

Starting out While this research is encouraging, its conclusions should be validated for different situations and industries. One way to do this is to compare the internal decision with the crowd’s choice. To do this, it is best to begin with a pilot. The pilot would have a clear objective with well-defined and articulated choices. To maximize the crowd’s value, the target decision should integrate both subjective and objective evaluations. Managers should also carefully pick the community they want to leverage, within the right online platform. Special attention should be paid to maintaining confidentiality and intellectual property requirements before reaching out publicly. When the pilot is finished, managers should compare the results of each decision and the impact of each process.

For now, Howard Stern can rest easy. Crowdsourcing decisions will never replace thorough analysis, time-tested judgment and gut feel. However, these qualities come with a price, which is often high in terms of cost, time and hassle. If crowdsourcing can be validated for other use cases, then tapping wisdom of the crowd will become an important decision support tool.

For more information on our services and work, please visit the Quanta Consulting Inc., web site.

The danger of common sense

A recently published book by sociologist Duncan Watts, ambitiously titled:  Everything is Obvious Once You Know the Answer:  How Common Sense Fails Us may turn more than a few executive heads.  This thought-provoking book challenges the universal belief that management decisions based on common sense – rooted in best practices, hunches and experiences – often lead to the best outcomes.  According to the book, the reality ends up being quite different.  Relying too much on common sense often leads well-intentioned and intelligent people to make poor strategic and tactical decisions in areas such as capital investments, product introductions, new market entry and advertising decisions.

Watt’s supposition is that people give too much credence to their prior and accumulated experiences, history in general and what they perceive as best practices when making decisions.  According to the research, a person’s common sense is faulty for a number of reasons:  it contains intrinsic bias; it is based on unproven or wrong assumptions and; it is too difficult to deduce clear-cut conclusions and action steps from an environment that is overly complex or unclear. 

Most people are hard-wired to depend on common sense on a daily basis. Once they recognize the outcome of a decision, all humans are biologically and psychologically programmed to rationalize why it has occurred.  This rationalization causes the individual to begin constructing their own paradigm of common sense which in turn is used to make decisions. 

Relying on common sense for decisions or to make predictions has dangerous implications.  For one thing, reality is usually very different from what was first imagined.  The future is quite complex and rarely reflects the same conditions that earlier decisions were based on.  As a result, it is highly unlikely positive outcomes will repeat themselves if the individual relies solely on history.  In my consulting experience,  the higher degree of uncertainty around a decision or potential outcome, the more likely senior executives will rely on subjective criteria like common sense or best practices as a basis for decision making.

If managers can not rely on common sense to guide them, how are they to make important decisions? 

Encourage contrariness

Organizations need to actively seek out contrary opinions and analysis, whether from internal or external sources, when facing key business choices.  To minimize bias and address informational blind spots, external experts should report directly to the management team or CEO.  Famously, the CIA undertook an external “Team B” analysis of the Soviet Union in the 1970s in order to better understand the nuclear threats facing the U.S.   

Shorten the action-reaction loop

Faster and more extensive customer and partner feedback reduces the need for companies to rely on subjective rationalizations like common sense.  Importantly, new technologies and tools such as CRM and social media can help by limiting uncertainty and delivering critical information to the decision makers.

Experiment

Dynamic companies like Google and Capital One often run quick and dirty pilot programs in order to gain concrete market data, gage the environment & competition and challenge internally held assumptions.

Put common sense in context

Experience and other intuitive factors can play an important role in making routine and mundane decisions where the likelihood and risks of failure are low.  Where the decision is strategic or involves sizable capital outlays, a more objective, fact-based approach would be best.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

 

Recession Lessons #3: Just-in-Time Management as Best Practice

It’s never been harder to be a C-suite executive.  Since the start of the recession, every firm has been forced to operate in an extremely difficult and uncertain environment.   Specifically, customer demand is soft and volatile; access to credit is tight; supply chains are at risk and; brands are vulnerable to social media-powered consumers and interest groups. At the same time, the pressure to make your numbers and follow good governance has not diminished.

This turmoil has significant implications on management and leadership practices.  For example, demand volatility gives managers less time to make bigger decisions.  Uncertainty creates a dearth of actionable information and shatters conventional wisdom, hampering efforts to set priorities and allocate capital.  Interconnectedness in areas like supply chains and counter-party obligations triggers 3rd party and system-wide risks that can not always be predicted or mitigated in the short term.  Despite recent stability, some sectors continue to operate in highly uncertain environments including Financial Services, Manufacturing, IT and Raw Material suppliers. 

Historically-proven approaches to management (e.g., consensual decision making, yearly strategic planning and matrix-driven execution), born in more stable and predictable times, are no longer as effective or relevant in periods of confusion.   Many companies might consider adopting new ways of decision making and managing, at least for the short term.

Most leaders can benefit in some way from newly emerging management best practices that have evolved over the past 18 months.  These situation-influenced structures, processes and habits could be described as just-in-time, adaptive or dynamic management.  Below, I outline some of the more successful new approaches and strategies.  Separately, other thought leaders are studying this area including McKinsey. 

  1. SWAT teams – In place of process-heavy & collaborative strategic planning and program management, a dedicated team of experienced senior leaders (the smaller team the better as long as key functions, lines of business and skill sets are included) is convened to monitor and manage key activities during periods of uncertainty.   These activities would focus on ensuring key customer retention, supply chain stability and mission-critical program management. 
  2. Rolling budgeting – A quarterly and dynamic process of managing spending, financial scenario planning and tight capital allocations replaces a yearly, formalized event which often is overly-reliant on questionable assumptions and macro economic variables as well as being cumbersome to execute.
  3. Strategy simulations – War gaming various market scenarios is an excellent way to drive immediate, real-world thinking.  War games help gage potential competitive moves, align around threats & opportunities and catalyze bias-free, fact-based thinking.
  4. Fact base updating – In times of uncertainty, making the right decisions at the right time requires having an updated information bank for mission-critical data such as customer/channel revenues, costs, and risk exposure as well as macro economic variables like exchange rates and input costs.

Paradoxically, corporate turmoil is also an ideal time to address internal structural, process and communication challenges.  For example, senior leaders could refocus their efforts on key strategic and leadership issues while empowering others to handle more tactical tasks.  Furthermore, a crisis is a great opportunity to goad internal communications, priority-setting and teamwork.

Companies can’t totally forecast the future and plan for every contingency.  However, they can improve decision making processes and structures to drive responsiveness, flexibility and speed. While I outlined a number of best practices, one size does not fit every organization and executives need to come up with the best structure, process and protocols to suit their firms.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Successful Strategy Execution – Lessons from the Military

It is widely acknowledged that without successful execution the best strategic plans often fail to meet expectations, resulting in wasted capital, reduced morale and organization disruption.  How can organizations bridge the gap between plans & actions and desired outcomes & actual results?

Firstly, it useful to review some of the barriers to successful execution:

  • Strategic plans are often poorly communicated down and across the organization, and lack a suitable strategic rationale;
  • Overt or hidden organizational friction gets in the way of smooth execution. Examples include: personal agendas impacting tasks, competing corporate priorities, poor operational accountability,   turf wars and changing organizational structure; 
  • The right information is not available to the right people at the right time

Companies can learn a lot about strategy execution by studying how militaries perform their missions.  The history of war demonstrates that “no plan survives first contact with the enemy.”  Historically, Generals have had to frequently make plan and resource adjustments as the situation changes, thereby slowing down the overall speed of execution.  To cope with this, many militaries have adopted a concept known as Mission Leadership (ML).  Basically, ML involves 3 core principles based on where and how leadership and decision making is exercised:

  1. Leaders provide and communicate clearly defined, succinct and understood military objectives through their subordinates;  these objective are trackable and are delivered with context;
  2. Leaders allocate resources to accomplish the task, provide dispute resolution and restrict their span of control so not to limit their subordinate’s freedom of action;
  3. Empowered and creative subordinates decide within their delegated freedom and available information how best to achieve the mission in the time allotted.

Corporations and militaries share similar external and internal states.  For example, both types of organizations compete in rapidly-changing environments characterized by a lack of (or imperfect) information, limited resources and internal misalignments.  Because of these similarities and it’s proven success on the battlefield, ML has been adopted by companies as diverse as Pfizer, Walmart and Diageo.

What have these industry leaders learned from ML?

  • The primary role of senior leadership is to identify key strategic priorities and objectives that support the business vision and then find the right combination of people, resources and structure to deliver maximum focus on these objectives;
  • To ensure accountability, the objectives must be measurable, tracked and linked to individual and departmental goals through performance evaluation systems;
  • A higher frequency and simpler style of communication is critical to ensuring alignment;
  • For effective decision making, employees need a clear understanding of personal and departmental operating space and their interdependencies with others;
  • There must be wide distribution of the strategic rationale and other critical pieces of information to guarantee clarity of purpose;
  • Leaders need to be facilitators that create the right environment for success including: delegating decision making down the organization, enabling a risk-friendly culture, stimulating cross-organizational adoption of best practices, and encouraging tactical improvisation for problem solving and stretch performance.

For more information on our services and work, please visit www.quantaconsulting.com