Difficult decisions
All organizations engage in the process of making strategic decisions around initiatives and yearly plans.
Fundamentally, the choices made involve:
- A balancing of anticipated revenue and profit gain
- Likely risk
- An assessment of the firm's ability to execute
In a perfect world decisions would always come down to the best return versus reward ratio. However, this is rarely the case.
Planning and decision-making activities must often cope with typical issues like a lack of expert resources, a difficulty in
collecting and synthesizing the "right" data and the ever-present challenge of time pressures.
What most executive don't factor in, however, is that they will also have to deal with negative behavioral and cognitive dynamics
among individuals and groups.
These covert effects manifest themselves as individual and institutional bias within the analytical, lobbying and decision-making process often resulting in sub-optimal outcomes.
Tainted love
McKinsey research describes two common sources of bias found within all individuals and organizations: Distortion and Deception.
Where there is an unrealistic assessment of a future result or challenge, distortion is occurring.
Distortion effects include:
- Over optimism (i.e. a high but unsubstantiated expectation for future sales growth)
- Loss aversion (i.e. an over cautious mindset creates a scarcity of innovation and investment)
- Over confidence (i.e. greatly underestimating the difficulty of integrating an acquisition)
The other source of bias, Deception, describes the conflict of interest between initiative or plan "owners", other decision makers
and corporate goals.
Deception effects include:
- Sunflower management (i.e. an abnormally high level of consensus around a senior manager's opinion)
- Champion bias (i.e. a CEO's over-reliance on the judgment of a trusted subordinate even though their bias is apparent)
- Misaligned time and compensation horizon (i.e. some managers focus solely on short term initiatives that correspond with their current position and incentive scheme)
- Misaligned risk aversion profile (i.e. some managers "play it safe" with plans and initiative, missing out on potentially attractive opportunities)
Bias, bias everywhere there is bias
Wherever you have human people interacting, you will likely find some or all of the above dynamics. However, our research finds certain
management styles and industries are more vulnerable than others.
For example, a firm that features a strong, charismatic CEO with a weak board and management team is likely to be vulnerable to Deception.
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In other industries (e.g. Private Equity), where there are time pressures and limited analytical skills and resources, the decision-making process will probably be impacted by Distortion effects.
Finally, many industries that are initiative-driven (e.g. packaged goods) will usually be impacted by varying degrees of Distortion and
Deception.
Seek and ye shall find
Since the vast majority of leaders are incapable of reading minds, there are a number of steps that can be taken to create an environment for more objective and thorough strategic decision-making and planning.
As each Company is different, so will be the remedy.
The first step would be to follow the adage of the Oracle of Delphi: "Know thyself."
Senior management should identify where conflicts of interest, analytical blind spots, and unrealistic expectations and goals occur.
For example, a manager could stipulate:
- An annual business review
- Periodic 3rd party input
- Regular senior management review of customer research
- A review of "wins and losses"
Secondly, management will need to ensure that plans and project leader objectives are tightly aligned to corporate goals. The use of regular market &
internal feedback mechanisms would promote ongoing alignment and learning.
To foster objectivity, long term thinking and innovation, reward systems should be linked to short and long term results;
a balanced scorecard could be used to promote risk taking and to prevent initiative failure from torpedoing a career.
Thirdly, the CEO may consider creating a separate planning group within the Company to guarantee independence, excellence and objectivity.
Examples of this include internal "skunk works" and new business venture units.
Moreover, for high-risk plans, the Board could purposely seek out a "2nd opinion' with other members of the firm or consultants.
Fourthly, to limit the effects of bias, management could "frame" the planning and decision-making methodology in a "template".
This will ensure all major decisions are subject to the same decision criteria, analytics, review and approval processes. Moreover,
encouraging the submission of alternative plans or investments would prevent an over reliance on initiatives with high personal,
career and time "sunk costs."
Finally, one must acknowledge that strategic decision-making does not exist in a vacuum.
An organizational culture that is conducive to open and constructive debate as well as self-introspection and learning will best be able
to reduce or in some cases eliminate ever present personal and organizational bias.
Ultimately, the CEO is responsible for creating and perpetuating these conditions and recruiting individuals who subscribe to these values.
Copyright 2007 Quanta Consulting Inc.
For additional strategic planning insights and a discussion of our relevant client experience, please contact us-
Mitchell Osak
Managing Director
Quanta Consulting Inc.
99 Bideford Ave
Toronto, ON
M3H 1K5
mosak@quantaconsulting.com
www.quantaconsulting.com
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