The Path to Better Decisions

Catastrophic decisions live on in the business lore as testament to the perennial difficulty of making good decisions. From the

AOL-TIME Warner merger to Blockbuster rejecting a partnership with Netflix, from J.C. Penney eliminating coupons to the debacle that was New Coke, these fiascos remind us that as leaders, we are often not nearly as smart as we think. While there is no way to guarantee that a decision will turn out well, we can improve the odds by following five steps.

1. Make sure you truly understand the problem. There is often an unavoidable tendency to fall into what I call ‘the conclusion trap’. In a fast-changing environment, executives often feel pressured to make decisions quickly. Combine that with years of training and reinforcement with the kind of System 1 (automatic, intuitive) thinking that Daniel Kahneman describes, and you have a perfect recipe for jumping to incorrect conclusions or solutions that can sink an organization.

Perhaps the most important step you can take in this regard is to go and see. Like a good detective, go to the ‘scene of the crime’ and directly observe the situation. That could mean going to the factory where you have an absenteeism problem, or visiting a grocery store where customers can buy your product. What’s critical is that you see first-hand what is happening. For major decisions, you can’t rely on two-dimensional spreadsheets or second-hand reports — you need a full-colour, 3D understanding.

It’s likely that Coca-cola CEO Robert Goizueta didn’t personally speak to many consumers before committing to New Coke; if he had, he would have learned that people buy Coke for its all-american brand connotation, not just its flavour. Likewise,

Ron Johnson would have learned that J.C. Penney customers enjoyed the thrill of saving coupons and getting great deals on their clothing.

2. Define a process. We tend to think of decision-making as a fine art that comprises intuition, experience and myriad other unquantifiable factors — rather than as a process that can be improved. Humans are afflicted with far too many cognitive biases to rely on the alchemy of ‘gut feel’. For example, it is well known that groups typically come to premature consensus because of deference to the senior person in the room (the ‘HIPPO effect’ — i.e. the Highest Paid Person’s Opinion). This habit blunts consideration of alternatives and prevents people from rigorously evaluating the downsides to a course of action.

To mitigate the pernicious effects of cognitive biases, organizations need to view decision-making as a process that can be monitored and improved with appropriate systems and structures. Here are five ideas that will help:

• Send materials in advance. To avoid peer conformity, allow people to think through the issues in advance, individually. Share the relevant information before every meeting and ask people to develop recommendations. Collect these ahead of time and discuss them at the meeting. The different perspectives will lead to more productive and thoughtful discussions.

• Clarify the assumptions. It is essential that everyone starts out with the same assumptions. The materials provided must specify what those critical assumptions are and what the goals are for the decision. Are you striving

to maximize market share? Are you anticipating a flat, declining or growing market? People must have the same starting point for their analysis.

• Conduct a pre-mortem. Pretend that the decision agreed to turns out badly. Assess ‘what went wrong’ and why. This discussion will identify weaknesses in the plan.

• Assign a devil’s advocate. A devil’s advocate arguing against your recommended course of action will point out any holes in the ‘solution’. Because the role is assigned, there will be less of a temptation to succumb to peer pressure to conform.

• Define the rules of engagement. Tribal knowledge in organizations teaches people how to behave in meetings. However, these might not be the best behaviours for a decision- making or problem-solving session. Be explicit about how people should interact and how the decision will be made (e.g. by consensus, unilaterally, by majority, etc.)

3. Solve at the right level. Decisions should be made, and problems solved, as close to the issue as possible. This means that responsibility for an outcome and authority to make a decision must be aligned. For example, at a $500M footwear company I worked with, the CEO — long removed from his product development role — decided that he didn’t like a particular style of shoe his team had designed. He decided to divert a container that was in transit to the U.S. (with $400,000 worth of shoes) to Africa, where he unloaded everything at a loss. Soon after, a competitor came out with a very similar product that literally flew off the shelves. The truth was that the VP of product design and development knew the market better than the CEO. This rule is simple: If an employee is responsible for an outcome, she should have the authority to make the necessary decisions.

4. Run experiments. The amount of data available to organizations today enables them to run experiments quickly and inexpensively, enabling them to easily validate new pricing strategies, marketing campaigns or product features. Before committing to a decision, run an experiment with a small group of customers, or with just one factory or geographic region. You might not be able to experiment with a merger like AOL and Time-warner, but you could certainly have tested the elimination of coupons at J.C. Penney.

5. Train and institutionalize these behaviours. Commit to teaching employees this decision-making approach. Make sure they know how to use the tools and structures listed here. Companies provide training for their employees on all kinds of skills, and decision-making should be treated in the same way.

In the end, a healthy organization has healthy financial performance, productive employees, sustainable activities and strong relationships with its communities. And a healthy decision-making process is essential to achieving all of these outcomes.

Daniel Markovitz is the Founder of Markovitz Consulting and the author of The Conclusion Trap: Four Steps to Better Decisions (2020) and Building The Fit Organization: Six Core Principles for Making Your Company Stronger, Faster and More Competitive (Mcgraw-hill Education, 2015). A lecturer at Ohio State University’s Fisher School of Business, his current or past clients include the New York City Department of Health, Sloan-kettering Cancer Center, Clif Bar and Abbott Vascular.