GE, Sears, TSB, House of Fraser have recently attracted the sort of publicity that no business leaders want. Their failures, caused by flawed decision making, headlined across global business and mainstream media.

Making decisions is a major part of what you do as a leader. So how can you avoid the pitfalls of poor decisions? Even highly experienced leaders can make poor decisions with serious consequences for employees, customers, shareholders and other stakeholders.  I’m not going to attempt another post-mortem on each individual case. Industry experts have already done that.

Companies make considerable investments to support strategic decision making,  employing experts, commissioning consultants to research and analyse options. Yet they often get it wrong.  No matter how good your analysis, it doesn’t guarantee you make good business decisions. Why?

 What can get in the way of good business decision making?

A key business decision could be an acquisition, a capital investment, a technology choice, a product launch or a senior appointment. Typically there are three elements involved:

1. Data gathering and analysis

2. The insights and judgement of leaders

3. A process for making the decision, which can be formal or informal

You might reasonably expect that leaders with good judgement who are provided with good analysis will make good decisions. But that is not always the case.

A survey by McKinsey of over 2,000 executives showed that they considered only 28% of strategic decisions made by their companies to be good decisions, measured by impact on revenue, profitability, market share and productivity. No surprise then that mergers regularly fail to deliver expected value, strategies often ignore competitive responses and large investment projects are habitually over time and budget.

Why so few good decisions? The same survey showed that the most important contributor to good decision making was the quality of the process. How the decision was made was found to be six times more important than the quality of analysis. This doesn’t mean analysis isn’t important. It was a critical factor in all the good decisions surveyed. But to avoid reaching poor decisions we need to pay more attention to how we make them. In particular, we need to recognise that our own cognitive biases can get in the way of good judgement.

What might business leaders be biased about?

The types of biases that get in the way of effective business decisions have been well researched by psychologists and behavioural economists, notably Nobel Laureate, Daniel Kahneman.

Here are some examples of common biases that affect business decisions.

Overcoming our biases to make better business decisions

Daniel Kahneman points out that the odds of overcoming biases in a group rise when there is a widespread discussion of them. A familiarity with what might get in the way is helpful but it takes a more comprehensive approach to enable effective decision making. Senior leaders and their teams need to:

• Openly explore major uncertainties around the options and their implications

• Encourage constructive challenge to their own points of view

• Consider the perspectives of a broad range of stakeholders

• Take input from colleagues based on expertise and experience, not just seniority

This approach delivers results

I facilitated a process like this when working with the senior leadership team of a major  software company. They were considering options for increasing growth. These included enhancing the existing product range, expanding into new international markets, entering new product and service markets. They rigorously analysed the various options including a major acquisition. This option was initially discarded because the last acquisition had fallen well short of expectations.

Critical to making the decision was including perspectives that challenged the assumptions of the influential members of the team. Considering the perspectives of a broad range of stakeholders played a powerful role in doing this. They included customers, employees, investors, partners and competitors. Data was analysed and projections reviewed. The most powerful insights were gained when members of the senior team “stood in the shoes” of various stakeholder groups to represent their perspectives in a  dialogue with their colleagues.  After in-depth review and discussion, the team agreed to pursue the major acquisition which was valued at 25% of their own market capitalisation.

Two years on here is the CEO’s assessment:

“We were reluctant to go for the acquisition because of our past experience despite  high potential growth and margins. Going through this process helped us see through our own blindspots. We realised we were better placed to manage the integration. We went ahead and it is now contributing to revenue growth up to 40% in some markets.”

 

Role of the Leader

How can you engage your team to make better business decisions?

Getting the team together creates opportunities to explore different perspectives.  The biases that undermine good decision making, however, are likely to have a strong influence in meetings. To overcome the impact of these biases, you need to act both as the ultimate decision maker and orchestrator of an inclusive and focused decision process.

The process needs to be inclusive to enable a constructive challenge to the dominant points of view. It needs to be focused as it would be counter-productive for you to become primarily an attentive listener, relying on the group consensus to emerge. You must create the right atmosphere, inviting others to contribute their views, showing that you are prepared to change your mind based on their input. Encourage expressions of doubt and acknowledge that reasonable people may disagree when discussing important decisions, dissociating it from personal conflict, using humour to defuse if necessary.

Your most important contribution?

Role model being inclusive and purposeful. Inclusive in taking account of a diverse range of perspectives.  Purposeful in channelling the contribution of your team to reach the decisions that will deliver the best outcomes.

Finally, I will leave you with these questions:

• Are you aware of any biases that have affected key decisions made in your company recently?

• What impact did they have?

• Is there anything you would do differently that would have improved the quality of that decision?