Wednesday, March 31, 2010

Bad Decisions

Recent articles from the McKinsey Quarterly have been looking at poor strategic decision-making. They are articles worth reading. Some of the articles look at how our biases can distort our thinking process. Others look at the problems which occur when we rely on our intuition rather than facts when making decisions. They claim these two issues can keep us from making the right strategic decisions.

After reading the articles, I thought I’d make my own comments on the subject.

The key question here is “Why do so many companies make so many poor strategic decisions?” We’ve all seen lots of poor decisions in the business world. To simplify the discussion, I’ve boiled poor strategic decision-making down to three causes:

1) The Main Goal Has Not Been To Make Good Strategic Decisions
If you want good strategic decisions, it helps to have good strategic decision-making as your primary goal. That may sound obvious, but unfortunately, many of the decision-makers on strategic issues do not have “making a good corporate strategic decision” as their main goal.

Instead, many of the leaders have different primary objectives. They tend to fall into the following two categories:

A. Avoiding Pain- Pain of Going Through Change
- Pain of Arguments/Discord in the Organization
- Pain of Taking a Risk
- Pain of Admitting Failure/Mistake
- Pain of Drawing Negative Attention to One’s Self as a Naysayer (hammers hit the nail that is sticking up)
- Pain of Going Against Wishes of Powerful Stakeholders (Shareholders, Key Customers, Bosses, etc.)

B. Increasing Personal Gain
- Career Advancement
- Benefits to One’s Silo in the Business
- Maximizing Bonus/Rewards

Often times, the right strategic decision involves pain and/or reductions in personal gain. If people are more concerned about pain and personal gain then they are about making the right decision, then they will, by nature, make the wrong strategic decision. Don’t assume that people automatically give good strategic decisions a priority when making a choice.

2) Wrong Amount of Facts
Facts provide the information which leads to knowledge. This knowledge helps us make better strategic decisions. If you eliminate fact gathering and analysis from your decision-making process, you increase the risk of making a wrong decision.

Relying just on experience and personal intuition can be dangerous. Your “golden gut” may not be as golden as you think. It needs to be tempered with facts. Therefore, too little attention to facts can cause poor decisions.

At the same time, too much attention to facts can also lead to poor decisions. When blazing new strategic trails, there may not be many facts at all to gather. If you wait until all the facts are in, it can be too late to act. First-mover advantage is over and the game is already won by someone else. Trying to gather consumer insights in an area where consumers have no prior experience can lead to bad and misleading data—sure the customers will tell you something, but it will usually be wrong, since they do not know how they will react under unknown circumstances.

Paralysis of Analysis (from too much data) is just as damaging as only relying on your golden gut (no data). A balance is needed.

3) Wrong Interpretation of the Facts
Just because you have the facts does not mean that you will interpret them properly. Three factors tend to cause improper interpretation:

A. Backward Lens
We often interpret facts based upon our knowledge and experience in the past. However, times can change. The “truths” of the past may no longer apply. Our worldview may no longer be in sync with the new truths of today. Sometimes we need to update our rules-of-thumb or risk having an obsolete point of view.

B. Preference Lens
Sometimes we see the world through the lens of our own personal desires and feelings. Our personal desires and feelings may be quite a bit different from those of our customers. Often times, our customers can be less knowledgeable and less wealthy than us. Their hopes and fears may be quite different from our own due to these differences.

C. Static Isolationism
The world is ever-changing, ever moving. Wayne Gretzky credits his hockey success to skating to where the puck will be rather than to where it has been. Similarly, if we only focus on interpreting facts as to what they say about “now,” we will never catch up to them. By the time we get to where that factual puck was, the puck will be somewhere else. Static analysis (assuming the facts we gather are not moving) will always put us in the wrong strategic place.

Not only are things moving, but their movement is altered based upon how others act. If I plan to take market share away from someone, I should expect them to retaliate. If I am a retailer, my success may have more to do with the decisions made by Wal-Mart in that category than my own decisions (because they are so powerful). Just because I choose not to cannibalize my business does not mean that others won’t choose to cannibalize my business. As a result, we cannot think in isolation (as if we are the only players in the game). We must consider the moves of others and how that will change the nature of our “facts.”

1) Get Decision-Makers to Have a Goal of Making Good Decisions
If “Avoiding Pain” and “Increasing Personal Gain” are contrary to good strategic decisions, then we have to fix this. Take away some of the pain in making right decisions by fostering a culture where risk-taking, dissention, and failure are acceptable—even praiseworthy. Use tools to make differences of opinion constructive rather than destructive.

Create a reward system where people are penalized for being too selfish. Bonuses should have a corporate component, so that you maximize your selfish financial interests only by looking out for the long-term good of the entire corporation

2) If People Cannot Decide In the Strategic Interests of the Corporation, Don’t Let them Make Strategic Decisions.
It is often important to get input from across the organization. Hearing diverse opinions from all the key sectors is good. But that doesn’t mean that all the contributors of information should get a final vote in the decision. If the people are too biased or cannot see the big picture, then thank them for their input and make the decision without their vote.

3) Get the Right Amount of Facts
As we saw earlier, too much or too little data can cause problems. One of the questions I ask myself is this: What is the likelihood that additional data would cause me to come to a different conclusion? If the likelihood is high, get more data. If the likelihood is low, stop gathering data.

4) Get Biases Out in the Open
You cannot deal with biases unless they are out in the open. When someone states an opinion, keep asking them why they hold that opinion until you get to the root of the issue.

5) Think Dynamically
Assume that the world is dynamic and that your actions (and the actions of others) will change the way the world evolves. Look at various scenarios. Anticipate responses rather than reacting to them. Do role playing, where you have people take on the role of your competition—to see how they will react.

Bad strategic decisions come from wrong goals, wrong amounts of data, and wrong interpretation of data. Unless we fix these issues, we will be prone to making bad decisions.

Strategic decision-making is not a “once, forever” proposition. If the passage of time lets you see that a prior decision was a mistake (or that a prior correct decision is no longer relevant), it is okay to change your mind. Changing your mind shows that you are strong, not weak. Not that you should change your strategy every week (or even every year). But never changing is a path to disaster, since a changing world will eventually make all strategic decisions obsolete.


  1. Gerald,
    This is a well-thought and idea-provoking post. May I add to your analysis one dimension related to cognitive dissonance or cognitive conflict? This is our tendency to our tendency to undervalue facts that are not aligned to our current thinking. We collect facts and information to underrate them in our decision-making process. So, collection of facts is one thing; using the facts constructively is another thing in our behavior of making decisions.

  2. Ali;

    Thanks as always for your comment. Yes, this is a long and complex topic. I couldn't fit it all into one blog. Your additions are important as well.