In business and in life, any outcome is a function of only two elements: the hand you’re dealt, and the decisions taken, says Wayne Borchardt, decision scientist and adjunct associate professor at Nova School of Business and Economics in Portugal. While you can’t control your luck, you can control your decisions, which is why he believes the best way to improve business outcomes is to improve the quality of your strategic decision-making process.
Prof Charlene Lew, GIBS faculty, who is an internationally published scholar in behavioural science and strategic decision-making, says strategic decisions should be seen as an ongoing process of evaluation and re-evaluation of the direction that a firm wants to take.
“Strategy is the product of the decisions that you've made, whether you’re deliberate about your strategy or not,” says Borchardt, adding that people such as Michael Porter, the renowned Harvard Business School economist and author, say strategy is about choices.
“Strategy is about choosing what to do and what not to do, but very little recognition is given to the fact that the atomic unit of strategy is the decision,” he says. “It's really a collection of decisions that determine where you choose to apply your limited resources. You can't arrive at a strategy without decisions.”
Lew agrees. “All organisational results flow from decision-making. The primary role of a manager is decision-making, and the more senior someone is, the more complex the decisions become. It’s therefore critical to the success of an organisation that the senior management team develops decision-making competence. And they’re not always very good at that. Leaders seldom take the time to reflect on or take stock of the decisions that they they've taken, or deciding on the decision approach they should follow for different contexts. Senior leaders don't necessarily know which decision-making approach is best for which circumstances.”
The decision factory concept
Lew explains that behavioural decision-making focuses on the cognitive and emotional processes that decision-makers go through (often subconsciously) in deciding what to do next.
“A famous theory that underpins all of that is dual process theory,” she says, citing acclaimed scholars such as Jonathan Evans. The idea of dual process theory has been popularised by Nobel Prize-winning psychologist Daniel Kahneman’s book, Thinking, Fast and Slow, which explores how some thinking requires slow, deeply analytical processes to decide which direction to take, whereas other decisions are quick, automatic and intuitive.
“Behavioural decision-making is about understanding how those two processes work together and how to grow the capabilities of each in decision-making,” she says. “There’s also an interpersonal component that can determine the effectiveness of a strategy, often specifically at the top management team level.”
Borchardt also references You're About to Make a Terrible Mistake!: How Biases Distort Decision-Making and What You Can Do to Fight Them, by Olivier Sibony, which uses the idea of an organisation’s “decision factory”.
A “decision factory”, Borchardt explains, aims to move people from viewing organisations as mere manufacturers of products or services to seeing them as manufacturers of decisions too.
“This makes it explicit that this is what the organisation (or at least the executive team) is there to do: to make decisions. That then raises questions about how they are making decisions. How much time, effort and attention do they put into improving their process for making tomato sauce or cellphones and achieving operational efficiency and high-quality standards? That part of the ‘factory’ is generally done well, because that's what the organisation considers to be its core business. But if you recognise that the only purposeful way we can improve the performance of an organisation is through our decisions, then surely we should be investing in that part of the organisation as a factory as well – improving the decision-making process of the organisation. But very little attention is given to that. Most organisations don't think about the importance of their decision-making process, especially around strategic decisions.”
Improving decision quality
Borchardt says that improving the decision-making process starts with defining decision quality. “It’s important to define (and continuously improve) the process for achieving decision quality. I've asked more than 1 000 executives how they would judge whether a good decision was made, and about two-thirds to three-quarters of people will say the outcome is the determinant of whether it was a good or bad decision,” he says.
Borchardt believes this is fundamentally incorrect as it ignores the role of circumstance. An organisation could do everything correctly and something unexpected – say a pandemic – could throw a spanner in the works. Or the reverse could happen, where a bad process is followed, but there’s some luck and good timing involved and things turn out well despite this. In that case the “dumb luck” is dangerous because the success might be attributed to that bad process and it will be repeated, placing the organisation at greater risk.
“The only way to determine whether you’ve made a good decision or not is through the process that you follow to make the decision,” Borchardt says. “This is a mind-shift for people. It's not that we shouldn't care about the outcome, in fact we design and follow a process with that outcome in mind, but we should not judge the decision on the outcome. We should judge decisions on the process.”
The right mindset
“Intuition in decision-making has been shown to only be reliable when certain conditions are met,” says Borchardt. These are: an unchanging environment and the experience of having made numerous similar decisions and getting fast, clear feedback on those decisions. He believes these conditions are rarely met when making strategic decisions in a business context. “We therefore need to be very cautious of relying on intuition, which some people might call experience and some people might call judgment. It’s not a robust way to make strategic decisions.”
Lew says that intuition does have a role to play – but usually in situations where an experienced decision-maker has accumulated domain knowledge.
“If you want to make high-quality decisions, you need to correct three fundamental beliefs,” says Borchardt. The first is to recognise the role of intuition, the second is to value the process over the outcome, and the third is to address what he calls “the myth of sustainable competitive advantage”.
Instead of chasing sustainable competitive advantage, Borchardt says organisations need to pursue transient competitive advantage. “The implication of this is that we need to frequently be revising and refreshing our strategy,” he says. “We need to follow a proven practice to develop strategy and to make strategic decisions if we want to reliably deliver higher-value results. You can't know whether any particular decision is going to deliver value. But if you are following a good process, then you can know that over a portfolio of decisions you will be delivering better performance.”
Once the right mind-shift is in place, an organisation needs to implement a decision-making process. Borchardt suggests four main steps:
- Frame the problem or opportunity: What are you solving for or trying to achieve?
- Generate strategic alternatives: Often this is neglected – people have a strategic approach in mind and try to substantiate why it’s the best course of action. Instead, all alternatives should be thoroughly considered.
- Put alternatives into competition with one another: This step addresses the undue influence of political power. By pitting alternatives against each other and evaluating which is most likely to deliver best on what the organisation cares most about, the option is selected on merit, rather than because any particular person or group suggested it.
- Convert the chosen alternative into a strategic plan: Once the best alternative has been selected (which is not always a clear or linear process), it needs to be converted into an executable plan.
The value of improved decisions
Borchardt, together with co-authors Dan Lovallo, Mikael Samuelsson and Ayrton da Silva, examined the impact of overconfidence on firm performance.
“We analysed the last decade of S&P 1500 financials using overconfidence proxies based on management earnings guidance and found that a third of firm value can be attributed to overconfidence,” he says. “That’s a $10-trillion opportunity.” Lew’s research, co-authored with Sean Combrink, confirms that overconfidence bias appears even for investment professionals who overrate their own performance compared to their peers.
Overconfidence bias can lead to value being left on the table or even destroyed. Borchardt believes that by focusing on better strategic decisions, firms can counter leadership overconfidence (i.e. debias their decisions) to unlock value. He cites the Woolworths acquisition of David Jones as a classic case of overconfidence and says this bias commonly plays out in M&As, as well as corporate reorganisations.
He speaks of the “3Ms” of lost value – misses (missed opportunities), mistakes (poor decisions) and malice (deliberate damage). Improving strategic decision-making can help organisations avoid misses and mistakes.
Lew adds that poor decision-making affects more than the top management team. Senior leaders need to pick up a mirror and ask themselves about the type of decision-making culture they're producing. “They need to spend more time understanding whether they are creating a space where people are confident to contribute, and they need to be more reflective in reviewing their strategic decisions and seeking to improve on them.”
Four conditions for better strategic decision-making
Lew says four foundations need to be in place for organisations wanting to improve their strategic decisions.
- Regularly reflect on decisions: Leaders need to develop the practice of reviewing their decisions and their decision-making processes to see where they can improve.
- Balance out biases: Our biases are unconscious, and at best we can hope to become aware of them. However, Lew says that even this is not very effective in addressing them. What does work, however, is to address blind spots by including multiple and diverse perspectives. There must also be clarity on who has final responsibility for making decisions (and being held accountable for them).
- Create an enabling culture: Indecision is something Lew says plagues many South African organisations. “Often, reasons for indecision relate to fear of making mistakes or taking a wrong decision,” she says. “Leaders need to examine their organisation’s culture to ensure it allows for open sharing of ideas and includes room for failure. Build a forgiving culture and cultivate a willingness to learn and grow in people.”
- The room to change direction: Lew says that it’s important that leaders don’t marry their decisions. There needs to be agility in the decision-making process and the flexibility for leaders to change their minds when presented with new information.