MAKE BETTER DECISIONS

“You’re still going to be wrong nine times out of ten. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for the many previous experiments.” Jeff Bezos, Amazon

Introduction

Being a business owner, CEO and manager, you are required to make many decisions every day to ensure that your business survives and thrives. It can be overwhelming.

In his book "The E Myth", Michael Gerber describes business owners as technicians; good at their trade or profession, but not so good as managers and decision makers.

Decision making methodology is a vast field of management and behavioural psychology sciences. In this article, we present an introductory look at some of the key foundations for good decision making.

This will help new and perhaps not so new managers to understand how good decisions are made and gain more confidence in making effective well thought out decisions.

Examples of decision making include new product and service development, pricing, marketing, capital expenditure, hiring, business acquisition and exit, and more.

Decision Making Steps

1. What decision is required?
2. Identify choices
3. Gather information on the choices
4. Analyse information and compare the choices
5. Make a choice decision. It may be a no action choice
6. Implement action
7. Review the results of action and adjust as required.

At first glance, this appears simple, and yet the process and outcomes are often poorly executed and result in failure. Following are ways to improve your ongoing success as a manager.

Fundamentals

1. Goals are the outcome of decisions and should be Specific, Measurable, Achievable, Realistic and Timely. This is only the beginning of decision making.
2. Goals and decisions must align with overall organisational goals and strategic plans. Otherwise, your business is like a random dartboard.
3. Decisions must ultimately end up delivering value to a firms customers. This enables alignment through the customer value creation chain.
4. Decisions must create value for the firm. Profitability is a requirement for survival and success.
5. Decisions may have a "Long Tail" result, e.g. buying a business, capital expenditure, new staff; each of these yields ongoing returns on investments.
6. What brought you success to date may not do so in the future. Business models must evolve due to changes in the operating environment and different dynamics as a firm grows larger.
7. Decisions do not always work out. In large firms as in the quote above, firms make large investments which often fail. Large firms have large capital bases to fund these large decisions.
8. Unsuccessful projects are treated as learning experiences and future strategies are modified for better likelihood of success.
9. In small firms, innovation projects are smaller and affordable within limited capital resources. Major expenditures are carefully screened as described below, and often require new borrowings.

Big & Small

In a small firm, the owner is quite hands on whilst being responsible for all decisions.

As a firm grows, the owner must delegate responsibility and empower supervisors and front line staff to make small decisions especially when dealing with customers. This frees up the owner to attend to big picture strategy development decisions and implementation.

Analysis Methods and Tools

1/ Decision Trees - When analysing data on different options, we calculate the results from each option and also consider the probability of reaching each option. A useful tool is Decision Trees. In the diagram each branch or choice is allocated a percentage likelihood of success which is factored into the option result.

2/ Pros and Cons listings - Another useful and simple tool involves qualitative assessments for each option or choice.

3/ Financial Analysis involves calculating financial returns and includes discounted cash flow calculations, ROI, payback periods and more.

Bigger decisions require more evaluation criteria.

In some situations, there may be pilot projects or products and services. New products and services may be subject to market research and customer focus group feedback.

Good cafes keep changing their food offerings and solicit feedback from customers. An example of a pilot project is the A$500 million Hydrogen liquefaction plant installed by Kawasaki in the Latrobe Valley in Victoria, Australia for export to Japan.

Decision Integrity

Once you or your CFO have analysed and quantified all the options' planned results taking into account probabilities, the owner is usually responsible for making the final decision choice.

Decision making is not always as simple as looking at the numbers as described above. Often there are other factors to consider and often these are qualitative or may involve timing, competitor activity, government regulations, pandemics, and supply chain problems.

Decision makers are all subject to cognitive bias (unknowingly irrational thinking) which affects their decision making. There are many dozens of biases, and these include:

1/ Confirmation Bias - look for information which confirms your beliefs; often overlooking vital data.

2/ Overconfidence Bias - the I'm always right syndrome. Hubris.

3/ Gamblers Bias - past events influence the future.

4/ Groupthink - following everybody else's choice must be right.

5/ Anchoring Bias - over reliance on the first lot of data or pre-existing data, e.g. trying the most expensive and best fitting suit first often influences you to buy a more expensive suit.

6/ Pessimism Bias - "we are no good at this"

7/ FOMO - greed is a common human condition. Knowing when to call enough often is counter productive.

For more reading on cognitive biases, refer to the footnotes.

Overcoming Cognitive Bias

• Devil's Advocate - challenges your thinking and provides different perspectives. Ask questions like "What could go wrong?", "What if there is a pandemic or extreme weather situation?", "Will customers accept our new prices?", "Are we too optimistic with our forecasts?", "Can we deliver this project on time and within budget?", "Why can't we succeed in this project?".
• Develop better reasoning and thinking skills. Develop "helicopter thinking" - looking at a problem or task from different angles and perspectives.
• Slow down decision making. Rushed decisions often overlook important factors. When you slow down, you will see more factors and implications of decision path options. The saying "Let me sleep on it" can be really useful in getting fresh insights.
• Consult with others - preferably independent of you or your managers; otherwise a Board of Directors or selection panel.
• Intuition - Managers with many years' experience in roles, industries and a myriad of events develop stored knowledge of what works and what doesn't. In Daniel Kahneman's book "Thinking, Fast and Slow", he describes Systems 1 thinking which is automatic and doesn't require much thought. Experienced managers often use intuition as part of decision making; sometimes contradicting data presented to them.

Good decision making is reliant on a combination of data, perception and interpretation and the ability to make sense before choosing a course of action.

Risk & Unprecedented Events

Decision making is about the future, so there is always uncertainty about the outcome. What worked last year may not work this year when it comes to the same decisions; this because factors like customer and competitor behaviour keeps changing.

The incidence of pandemic disruptions, severe climate events, geopolitical matters, government policies and economic impacts adds further complexity and uncertainty.

Decision choices must therefore factor in:

• Contingency activities and costs.
• Loss of sales and customers.
• Supply chain disruptions.
• Increased costs of doing business.
• Reduced staff productivity.
• Increased staff turnover.
• Additional cash or working capital to cover increased costs.

Innovation & Learning

To be able to handle continual change and improve decision making capabilities, firms must prioritise:

1. Ongoing learning with a focus on delivering value to customers. Systemised and uniform value creation processes reduce variations and defects and contributes to better decision making. Staff are clear about operating procedures.
2. Enabling and empowering staff to handle front line decision making at the micro level improves confidence, culture and productivity.
3. Continue to innovate and improve its products, services and workflows. This also facilitates improved and confident decision making when staff are engaged in ongoing change.

Summary

Clarity in a firm's goals and values are the starting point and foundations for good decision making. Such decision making must be aligned with a firms goals and strategies. Otherwise, you may end up in a mish mash of a business.

Owners, managers and staff are all responsible for and must develop good decision making skills.

Good decisions can still result in poor outcome due to external factors out of your control. A good example is the advent of the Covid pandemic lockdowns which disrupted business operations at a time when the economy (of Australia) was on the rise.

Small firms have limited financial resources and must make pioneering decisions in small steps. Larger decisions require borrowing from financial markets.

Decision making is often affected by cognitive bias which result in sub-optimal results or sometimes complete failure. All major decisions must have risk calibrated steps to reduce cognitive bias.

Not all decisions end up with favourable outcomes. Monitoring and early intervention is essential to minimise financial losses.

Firms do well when they invest in systems standardisation, innovation and learning in order to improve thinking and decision making skills of owners, managers and staff.

Finally it is often easy to say in hindsight that a decision could have been better; such is hindsight. The important thing is good outcomes.

All the best in your business endeavours!

Additional reading

"Thinking, Fast and Slow", Daniel Kahneman

"Perfectly Confident", Don A Moore

"Think Again", Adam Grant

"Culture and the Senses: Bodily Ways of Knowing in an African Community", Kathryn Linn Geurts - Seselelame is the name used in African culture (Ghana) for bodily felt senses. This is in addition to the Western model of the 5 senses. The closest Western concept is "gut feel" or intuition.

Exercises

1. When you put your shoes on, is it - Sock, sock, shoe, shoe; or sock shoe, sock, shoe. Left, right, left right; or Right, right, left, left; and so on. What happens when you change the sequence each day? System 1 - fast decision making, until you change the routine.
2. If you have a partner, ask them to swap sides if you sleep in the same bed. What is the response? System 2 thinking (conscious thought) required to change behaviour.

Frank Choy, 15 September 2022