As president of your company, how do you assess how good your business performance is? Do you review financials, daily operations efficiency reports, SalesForce entries, cash flow? Do you begin by talking with your department heads or VPs? Do you call your customers and ask, “How are we doing?” And how do you make decisions based on that information?
McKinsey Quarterly just published “Making Great Decisions”. In it authors Chip Heath and Olivier Sibony address improving decision processes through behavioral economics. While we recognize our own biases, they argue, we are not immune to them in making decisions. They argue against traditional decision-tree analysis because decisions end up in predictable patterns. It turns out that personal biases, politics and persuasion are the three p’s of decision making.
What’s at work here is our tendency as presidents (or, for that matter, our department heads) being unwilling to admit to not knowing or being unable to make a rock solid call.That tendency grows as decisions become more critical or need to be made under conditions of increasing stress. We need to show confident leadership which reintroduces our biases, rather than ackowledge that there is a great deal of uncertainty in the outcomes of actions we take.
We try to build better decision-making processes by understanding how skill and luck intersect to influence the outcome of decisions. We talked about two books (Success Equation and Black Swan) in an earlier blog that focus on luck, randomness and probabilities in determining outcomes. Strategies are richer if there is consideration of luck or randomly occurring events influencing outcomes instead of choosing to believe that we control performance based solely on our strategy and our team’s hard work.
One way to make superior decisions is to discuss the skill / luck continuum, and then conduct a realistic strength, weakness, opportunity and threat (SWOT) analysis of one’s business. We suggest companies then review their key performance indicators (KPIs) to determine how they are really performing in advance of events hitting the income statement or balance sheet.
This process enables valuable role-play that provides second or third alternatives to first conclusions and improves the overall decision process. Messrs. Heath and Sibony cite a study that suggests decisions based on such key executive role-play turned out six times better than if only the first alternative was considered.
This decision process improvement is amplified when behavior biases of key executives are understood. Simple tools exist to help with this understanding, such as DISC. All in all, these processes help create or strengthen a culture where creative debate thrives and prepares companies to understand that outcomes will be below expectation, as expected or above expectation and allow plans to be developed accordingly. A wider range of options makes for more debate and builds a decision-making environment where reality testing of assumptions is a critical part of decision making.
It is also critical to get facts quickly and minimize confusing assumptions with facts on which major decisions are made. We work with companies to quickly get out of meetings and in front of customers to test ideas and get feedback quickly. Large corporations get bogged down in testing to statistical significance out of a greater need for risk aversion as a public entity. As entrepreneurs, we accept more risk, but at the same time minimize threats to our financial health and wealth.
As a business owner/entrepreneur, do you believe your abilities and those of your team to make decisions successfully and consistently over a long period can be improved substantially or not?