A Decisive Edge

Despite having top brains, a great team and a hard disk filled with data, some firms still make lousy decisions. Is it true that 'pragmatists act on evidence, heroes act on guts'? Rebecca Alexander explores the art of strategic decision-making.

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Last Updated: 09 Oct 2013

Your company is in a crisis. Its pole position as the producer of a best-selling consumer brand is under attack from a long-term rival. The competitor's new marketing campaign has focused consumer attention on a particular characteristic of its otherwise identical brand - an aspect you had considered unassailable. Your company is desperate to win this highly public battle. In a tense board meeting, it's suddenly your turn to speak. The company's future rests on the board's decision. What do you suggest?

Coca-Cola found itself in this predicament in the 1980s, when its arch-rival launched the Pepsi Challenge taste tests. Faced with a fight on the one area they'd never worried about before - the taste - Coca-Cola ran focus groups that seemed to confirm it as the issue. Yet the company made a primary error - it failed to look for contradictory evidence before settling on a solution. It did everything else by the book - including reformulating the Coca-Cola recipe (at great expense). But the result, New Coke, was an embarrassing flop. Changing the flavour was the wrong decision.

Coke's case illustrates the truism that a great team, a fast brain and a lot of data don't guarantee a good decision. For a manager, decision-making skills are essential to continued success. Get a decision like this right and you're likely to be congratulated. Get it wrong and you'll be sidelined by your boss and lose the confidence of your team. A bad decision can stall a promising career.

The quest is on, then, for smarter decision-making. Academic research divides this subject roughly into three areas: structures, styles and thinking errors. Knowing how to use the structure is of course helpful, but it's an awareness of decision-making styles and avoidance of common errors in thinking that can turn a bright individual into a reliable decision-maker. 'Structures allow a perspective on the problem and on the risks,' says Derek Bunn, professor of decision sciences at the London Business School. 'They also enable you to make decisions that are defensible, credible and that you can easily communicate.'

But structures are only as good as the person using them. 'There's no panacea,' explains Bunn. 'You can't automate decision-making. All that structures can do is provide an extra level of analytic capability. No-one believes that you can delegate an intuitive decision to a quantitative model any more.'

What Bunn is driving at is that a bad decision is less likely to be a result of the decision-making process than of the mindset of the decision-maker. Different decision styles include those of the snap decision-maker, who boasts of 'gut instinct'; the fence-sitter, who keeps the options open; the democratic decider, who canvasses colleagues' opinions; and the uncertain manager, who's easily led.

Says Professor Nigel Nicholson of the London Business School, author of Managing the Human Animal (Texere): 'Styles vary across cultures, over time, with maturity and experience, and with background. There is a bias towards one of two models. Model 1 is the collegial first-among-equals style: high in involvement and low in power. Model 2 is the lead-from-a-distance style: top-down, goal-setting, sometimes visionary, often empowering (by leaving people to their own devices), yet driving for action and results.'

Both styles can work, and it's possible for one person to switch between them. 'Model 1 suits situations where you have to constantly adjust to change and work together,' explains Nicholson. 'And you can be very successful in model 2 if you have highly skilled, self-managing professionals reporting to you.'

High-flyers know that once you've found your style, you don't stop there. Talented managers adapt their decision-making as their career progresses. Kenneth Brousseau, CEO of US software house Decision Dynamics and Gary Hourihan at Korn/Ferry International have identified the decision-making patterns that permeate an individual's career (Harvard Businesss Review, February, 2006). Junior managers favour a 'decisive' style that focuses on choosing and implementing one option, with an emphasis on speed and simplicity. But as managers progress, the most successful adopt a flexible and integrative style, which enables them to solicit, choose from and adapt solutions as the situation changes.

This more participative and responsive style is clearly evident across the highest-performing 20% of managers studied by Brousseau and Hourihan. Failure to evolve, they say, 'can be fatal to your career'. As evidence, they point to the lowest-performing managers, whose styles do not develop over time.

What about those who find it hard to make decisions? According to LBS's Nicholson, it's rare for hopeless prevaricators to get into positions of leadership - one good reason to brush up on your decision-making skills. Yet some leaders are accused of inconsistency because they can see everyone's point of view. Says Nicholson: 'If you're lost in a forest, you need a compass. The compass for decision-making is an overarching concept of the company's vision and purpose, and of your own identity. If you don't have this, you need to spend time digging down into yourself and thinking about what sort of leader you want to be.'

In other words, to become better at decisions, look at the bigger picture - the company's aims and your own career objectives - and use that as your decision frame.

Of course, not all decisions are entirely your own. Some you inherit, others are partially or wholly dictated by a boss, the context, a competitor's actions or your predecessor's choices. Says Ralph Keeney, a research professor at the Fuqua School of Business at Duke University, North Carolina: 'There are three things that unambiguously frame your decisions: what is the problem, what are the objectives, and what are the alternatives? It's after this that the decision-making takes off. Too often, that initial framing is left to someone else. The fundamental thing is to recognise that this occurs and try to put it right. You need to ask the right questions. Don't just decide what your objectives are by reacting to the moves of others - whether competitors, colleagues or bosses.'

But your mind can trip you up even when you've developed your decision-making style, such is the faulty psychology underpinning many of our decisions. Social scientists recognise the tricks our minds play on us, such as discounting important information, misremembering facts and acting on our biases - all while we think we're doing no such thing.

According to Max Bazerman, professor of business administration at Harvard Business School, such flaws are rife, even among seasoned decision-makers. 'While there is plenty of good advice available, most people do not follow it. Why not? Because we fall victim to a variety of predictable errors that not only destroy our intuition but also hinder our tendency to implement good advice.'

Imagine you're choosing a new software package to process sales data and bring you up to the speed of your competitors. A consumer report lists a particular package as the best, but a friend who has just installed the system says it's nothing but trouble. The friend represents one isolated, unrepresentative incident, whereas the consumer report has tested thousands of software packages and is far more accurate. Yet you're now very unlikely to buy that particular software.

Bazerman calls this the 'availability trap'. The more salient, memorable or recent information is, the more we rely on it to make our decision. An anecdote is far more available, and therefore persuasive, than dry data - but that doesn't make it the right information on which to base a decision. Instead, examine data, information and statistics carefully and don't let colourful information or anecdotes influence you.

The availability trap is one of several decision-making errors we're prone to, particularly under pressure. Faced with cognitive overload, our minds use shortcuts - known as heuristics - to see us through. These rely on a combination of received wisdom, previous experience, habit and emotion - all of which can go against rational calculation.

For some theorists, heuristics is enjoying a resurgence over old-fashioned deliberative decision-making. Author and New Yorker journalist Malcolm Gladwell recently devoted a whole book, Blink (Allen Lane), to instinct, or 'thinking without thinking'. Research from decision-making experts in the Netherlands suggests that 'unconscious thought' (akin to 'sleeping on it') leads to better decisions than the slow, analytical approach. And business leaders like Jack Welch have popularised the 'from the gut' leadership style so that many now see instinctive decisions as the hallmark of a great leader. As Harvard Business Review suggested in January 2006: 'Pragmatists act on evidence. Heroes act on guts.'

And, indeed, most of the time heuristics works. Imagine if, when you got up in the morning, you stopped to consider which side of the bed to get out of or whether to put on your right or left sock first. If you deliberated over each decision, colleagues might soon call, wondering why you weren't at work. Heuristics avoids this problem as it enables you to make decisions fast, but largely unconsciously.

Think back to this morning. Why did you put your socks on in that particular order? It's unlikely you'll have a reasoned answer. This highlights two main problems with heuristics: we use it all the time, but we're not always aware that we're doing so; and it may conceal basic flaws in our thinking and judgment.

Keeney has compiled common pitfalls in his book, Smart Choices: A practical guide to making better decisions (HBS Press), co-written by John Hammond and Howard Raiffa. A common error he picks out is our tendency to seek confirming evidence. We often subconsciously decide we do or don't like a particular solution or decision and then look for evidence to confirm our hunch. This might explain the New Coke debacle. Coca-Cola went about its decision-making the right way - carefully analysing and weighing evidence. But Pepsi's campaign lured it into chasing the wrong information and falsely confirming taste as an issue.

To avoid this, Keeney recommends being honest about your motives in making a decision. Are you really scrutinising data with a view to making a smart choice, or looking for evidence that supports your favourite option? If you are decision-making with your team, don't ask leading questions - encourage team members to play devil's advocate rather than yes-men (see panel above).

Another common pitfall is anchoring. As an example, ask yourself the following: Are there more than 150 nations in the UN? Got an answer? Now try this: What's your best guess of how many nations belong to the UN? For most of us, the number 150 influences our answer to the second question. If the first had said 'are there more than 50 nations in the UN?', our answer to the second would have been much lower. Our minds seize on initial impressions, data or estimates and use them to anchor subsequent thoughts and judgments.

Even the way a problem is presented can serve as an anchor. If your manager highlights an issue - say, poor sales - and suggests spending more on advertising, you and your team are more likely to focus on this solution than to explore new, unrelated avenues. Your boss's comments, however throwaway, have become your anchor. To get round the problem, Keeney suggests approaching decisions from different angles, deliberately abandoning your first line of thought, and not taking the first thing you hear as gospel. Push yourself to seek fresh perspectives.

We're also biased in favour of the status quo. Maintaining it means we avoid sticking our necks out. Faced with a plethora of options, choosing the status quo is easier - which is why so many of us fail to switch mortgage lenders when the honeymoon period of low rates expires; we just can't face the choice and look for reasons to stick with what we know.

Keeney suggests asking yourself: 'Would I consider the status quo as a good option if it wasn't already the status quo?' Don't dramatise the difficulty of changing the old order. And if there are many possible options, force yourself to choose rather than default to what you know.

Even once we're aware of these pitfalls, we will inevitably still make poor decisions at times. What then? First, admit your mistake - to yourself if no-one else. It's tempting to keep metaphorically throwing good money after bad - persisting with that dying project, hanging onto the underperforming member of staff you hired. To do otherwise would be to admit your mistake - particularly hard if your company doesn't tolerate errors of judgment. But it's imperative to cut your losses and start afresh. Imagine you are approaching the situation as an outsider - what would you change? Don't waste time on recriminations, instead, start the search for new solutions.

We can be our own worst enemy. Even if we know which decision-making strategy to use, we can trip ourselves up with our unconscious biases, lazy thinking and failure to seek out as many options as possible. Because taking mental shortcuts is pretty much bar-coded into our brains, it requires constant attention to adjust our decision-making. As Keeney points out: 'The best defence is always awareness.'

Be prepared to evolve your style, to spot the tricks your mind plays on you, and to guard against them, and you're well on the way to being an excellent decision-maker.

ALLAN LEIGHTON CHAIRMAN, ROYAL MAIL

Some decisions are systematic: you know you are going to have to take them and are prepared for it. Others are unexpected: you get a call from someone and you have to make a decision. I run every day and I use my running time to think about the decisions I know I am going to have to take. I also use yellow legal pads to draw scattergrams - my rule is one side of A4 only, otherwise they get too complicated.

I operate at a strategic level so I'm only interested in the big stuff. I have trained my mind to exclude the minutiae - the treacle, I call it, because that's what you get stuck in. One of the best ways of avoiding the treacle is to avoid meetings - I plan my time around not going to meetings. I put everything else I want to do in my diary first, then after that, if I can, I will go to a few meetings. Also, I keep one day a week completely free, to use as thinking time.

When it comes to the unexpected decisions, I rely mainly on what people call gut feel. But gut feel isn't really in your gut, it's in your mind. It's an assimilation of all your experience. I will take a decision on the spot, but only if I'm sure. There's no need to get pressured into taking snap decisions if you don't want to; you've always got more time than you think - that's a fact, whatever anyone tells you. Only life-threatening situations are really urgent.

The other important thing is not to be afraid of owning up to your mistakes - if you know you have screwed up, admit it and move on. Providing you're not putting your hands up all the time, your credibility among your colleagues will go up rather than down; even the best decision-makers are only right 75% of the time.

- On Leadership by Allan Leighton (Random House, £20) is published next month

JULIE SPENCE CHIEF CONSTABLE, CAMBRIDGESHIRE CONSTABULARY

I make decisions on a mix of evidence and intuition, but ultimately, it has to feel right. I can make them quickly, but I like to think I make them in a balanced way. That is something to do with the police force - it's a quick-decision organisation. And when you've got it wrong, it's about saying you've got it wrong and making sure that people don't expect 100% right decisions, because some decisions are iterations. What might be a right decision today actually iterates into the wrong decision tomorrow. You then have to be swift enough to say, yes, we got that wrong and we'll mould and change as a consequence.

In operational scenarios, we often make decisions on incomplete information, say, what is happening behind a closed door in a hostage situation. You're trying to formulate the best course of action with piecemeal information and that can be taxing. Sometimes, you can't wait for everything. If you do, you may well get it wrong because the disaster would have happened.

Some organisational decisions can take a while to come to a conclusion, because you need to understand others' views and develop consensus around them. But there are some decisions that, as the leader of the organisation, you have to take on your own. If you really are determined about the way you are going to go, then I think you have to be honest and say that these are the reasons I am going to make this decision and there's no point having a debate around it.

When there is time for debate and you don't have a view on what you want to do, people then know that their opinions are valuable, and you end up with a much more transparent organisation.

WILL CHASE FOUNDER, TYRRELL'S POTATO CHIPS

I always have an instinct about every decision I have to make, and I follow it. It's like if you're buying a house, you get a feeling about the one you really want. If I can't tell immediately, then I will prevaricate until it comes out. I know I shouldn't do it; it can be frustrating, going round in circles until I make my mind up.

But some of the biggest decisions I've made have been taken on the spur of the moment - like when I decided to stop Tesco from selling our chips. We decided we wouldn't go on their list until the brand had matured for a bit, but then they went behind our backs and listed us anyway. It was hard to say no, but it was the right thing to do - we got lots of good press and support from customers. I didn't like the way that Tesco had behaved - it was arrogant. One of their guys said: 'You go back to your farm and do what you do there and leave the selling to us.' I thought, 'Right, you bugger.'

I've known hard times - I was bankrupt in the early '90s - and that made me cautious. I always had to have a plan B. But then I surprised myself. From the moment I thought about making chips I just had a hunch it would work, and I backed that hunch all the way. Now that the business is doing well, I think the most important aid to my decision-making is delegation. I can't do it all on my own any more, and I don't want to. My job is not to go through the day firefighting, but to get out and have ideas; about new flavours and new varieties, and new lines like the potato vodka we are about to launch.'

ABOVE BOARD - SET THE TONE FOR YOUR TEAM

Group decision-making - at team or board level - can be an exercise in second-guessing colleagues' real opinions. Is your ad director agreeing with you because it means an increase in her budget? Is your deputy scared to dissent? Is the CEO nodding because she's bored and wants to leave? Whenever a group decides, there are two traps to watch out for: the false decision, where apparent agreement hides silent dissent, and the related 'groupthink', when a group feels so sure of its decision that conflicting evidence is ignored. To avoid both and create a good decision-making structure, managers should ...

Create good lines of communication - unencumbered by formality, distrust or a fear of authority.

Encourage colleagues to think through decisions thoroughly. Ask them open, non-aggressive questions about their solutions, making it clear that they won't be penalised for dissenting.

Create a spirit of enquiry with questions like 'What if our company strategy is wrong? How would we know?'

Hear the experts out - and beware the opinionated who dominate meetings with loud talk but little factual information.

Find a devil's advocate. Advice brought by your team without contradictory data should ring alarm bells that everyone's singing from the same hymnsheet too early. What's the conflicting data?

Don't bury contradictions or disagreements. Make sure the opposing views are discussed, but don't let the debate become personal - keep it constructive.

Remember the wider purpose of your group's work for the organisation. Asking the right questions creates a culture of enquiry - so you're less likely to miss something important.

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