9
Making Sound Decisions

Learning Objectives

By the end of the chapter you should be able to:

• Identify the steps of a rational decision-making process.

• Define the problem or decision correctly.

• Consider the context of the decision.

• Create and evaluate feasible alternatives.

• Make the decision.

• Implement the decision.

Which job applicant should you hire?

How should your department’s budget be spent?

Who should be in charge of the upcoming trade show?

Should we adopt a new technology now, or wait until we can better gauge its performance?

Should you buy or lease three new delivery trucks?

Managers make many decisions like these in the course of the day and are responsible for their outcomes. You could reasonably say that the workaday life of an organization is nothing more than a series of activities initiated and controlled by decisions. You can also say without contradiction that the well-being of an organization depends on the quality of its decisions—especially the big ones.

Many decisions can be made on the spot and with little or no input from others. All important decisions, however, should be handled through a rational, fact-based process.

This chapter describes a rational decision-making process that you can apply to all types of important workplace decisions. That process has five steps and involves collaboration among the manager/decision-maker and other appropriate parties. Those steps are: frame the issue or problem, consider the context of the decision, consider and evaluate alternatives, select the best choice, and then implement the decision. This process is rational in the sense that it emphasizes facts and evidence, leaving little room for power politics to creep in and spoil the result. The decision process offered here, however, provides no guarantee of a good outcome. Decisions, after all, involve the future, about which there is no certainty. Thus, even a well-made decision can produce a disappointing result. However, a solid decision process can put the odds of success on your side. It can also shield you from second guessing and criticism that often follow a poor outcome.

Before discussing the right way to make decisions, consider the wrong way, as described in the following scenario.

Hans is the Vice President of Research and Product Development for a consumer products company. The job of his unit of scientists and engineers is to develop and launch pet food products that address customer wants and needs, as determined by the company’s market researchers and field salespeople, and with the approval and funding of top management.

The company’s market research people had become quite excited about a new dog food product concept: a one-day ration shaped like a bone. Market surveys found that dog owners were attracted to the idea of giving their pets a single meal in a treat-like form that would satisfy all the dog’s nutritional needs for the day. No such product was available. To meet this need, one of Hans’s people suggested creating a bone-shaped, bone-tough product. “We could make it hard and very dense, like a bone. And we could cram an entire day’s nutrition into it.” Customers invited to a focus group loved the idea, and further market research indicated that it would be favorably received by dog owners, who would switch from dry and canned food to “Daily Dog Bone Ration,” as they called it. So Hans estimated the resources he’d need to develop and manufacture the new product, and requested funding from management.

As proposed by Hans, the project seemed like a straightforward decision with plenty of market and cost data: Spend $1 million to create a complete product design, another $2 million to develop a process for manufacturing it, and another $2.5 million for promotional test marketing in four major metro areas around the United States. If responses from those tests were favorable, manufacturing would be ramped up at a cost of some $5 million for a nationwide product roll-out. Hans anticipated quick approval by management, but he hadn’t counted on Jennifer, the Vice President of the canned dog food division.

Jennifer had learned of Project Dog Bone a month earlier. Fearful that its success would cut into her division’s canned food sales (and her annual bonus), she began lobbying Ray, the company’s fiscally conservative and cautious chief financial officer (CFO). “Ray, they’re talking about pouring $10 million into a risky venture that, if it’s successful, will cannibalize our canned food sales. We can’t afford that.”

Ray took it all in.

Jennifer also used her weekly luncheon with the CEO to subtly pour cold water on Hans’s project. “I understand that Hans and his R&D people are working on some type of far-out dog food experiment. Food shaped like a bone,” she said disparagingly while munching her salad. “Our chain supermarket customers are very conservative. They probably won’t go for that. And I think that Ray is concerned about sinking millions into a risky idea when so many other parts of the business are starved for cash.”

By the time Hans obtained a hearing from the company’s New Products Committee, Jennifer had managed to sow seeds of doubt. Both the CEO and CFO were on the committee, as was Phil, the VP of Marketing. Phil had seen the positive market research on Project Dog Bone but he didn’t want to advocate for it, especially if his two more powerful colleagues, Ray and the CEO, were set against it.

During the ensuing discussion, Hans had to champion his idea, just as a lawyer would defend his client before a judge and a panel of jurors: by presenting his data and arguing for a favorable verdict. As head of the canned pet food division, Jennifer participated in the meeting. She played a prosecutor-like role, arguing against the project and its funding. “Yes, we have some positive market surveys,” she said, “but they only involved a small sample of potential customers. And the risks are very high. We could lose millions.” Hans countered with his projected costs, and sales revenues forecasted by the marketing department. “Where did those revenue forecasts come from,” Jennifer parried, “out of a hat?”

In the end the executive committee was split 2-to-1 against Hans. And so the Daily Dog-Bone Ration concept died an early death.

What was wrong with this decision process? The most obvious problem was Jennifer, who used her influence to poison the water for the new dog food product by exploiting peoples’ natural aversion to risk. Phil, the marketing vice president, also did his part to undermine the decision by playing office politics; he didn’t want to oppose the CEO and CFO. All of them—even Hans—were guilty of accepting a yes or no situation. No one offered an alternative to the proposed new product or the plan for marketing it.

This is not an unusual example of decision-making in organizations, from the boardroom to the shop floor. Management often approaches key decisions as “We’ll either do this or we won’t,” with no discussion of alternative choices. Powerful individuals apply influence in ways that do nothing to produce a good decision. People in the know often hold back because they don’t want to oppose someone who might have something to say about their bonus or future promotion.

In order to win in this environment, a person must be a strong advocate and present the good parts of a proposal while remaining silent about any deficiencies. In order words, he or she must sell the idea to the decision makers. This is not a good way to make important decisions. The process you’ll learn about in the rest of this chapter is far superior.

A RATIONAL DECISION-MAKING PROCESS

The process described in this chapter is a simplified version of one developed in the early 1980s by Strategic Decisions Group, a Palo Alto, California-based strategy consulting firm (Matheson and Matheson, 1998). It is based on principles of decision science and has been applied in one form or another over the years by firms in the auto, aerospace, pharmaceutical, energy, motion picture, and information technology industries. It is effective in that it involves the right people, and requires them to step back from what might be the obvious decision choices and to develop alternative choices that may prove better.

The process involves five steps:

1. Define the issue or problem correctly.

2. Consider the context of the problem or issue.

3. Create and evaluate feasible alternative choices.

4. Make the decision.

5. Implement the decision.

At every step of this decision-making process, which is diagrammed in Exhibit 9-1, it is important to get the input of key stakeholders.

Involve the Right People

When simple choices must be made, a manager may have all the information needed to make a good decision. Decisions on big, complex, and costly issues, however, require more information and the knowledge and insights of many people. A rational process therefore involves three sets of people—the “right” people:

• The actual decision makers. These individuals have the final say in the matter. They also have the organizational authority to make the decision stick and to allocate the resources needed to implement it.

• Individuals with relevant knowledge or insights. These might be staff personnel, market researchers, salespeople with close contacts with customers, engineers who understand the technical issues, financial experts, and so forth.

• Employees who will implement the decision or have a stake in the outcome. Decisions produce consequences. In many cases, the ultimate decision makers are far removed from those consequences and lack information that is critical to successful implementation. People who must implement a decision or live with its consequence often have insights that decision makers lack.

Involving the right people may be the single most important part of the decision process. You want to bring in people with relevant information and experience, with open minds, and an ability to deal with data and with the uncertainty that goes hand in hand with every important decision. Further, you want these people to work together, to share ideas, and to create back-and-forth dialogue. The decision makers must be part of that dialogue from the start. If you are the decision maker, the worst thing you can do when a complex issue is at stake is to have your subordinates do all the framing, generate all the alternatives and evaluate them, and discuss all the assumptions and risks without your involvement. No matter how carefully the group tries to report its deliberations, too much is lost in that approach. When the time comes to make the decision, you will be lacking key information.

STEP 1: DEFINE THE PROBLEM OR DECISION CORRECTLY

The first step in a rational decision-making process is to correctly define the issue, the problem, or the opportunity. Doing this isn’t always simple, as different people often bring different mental frames to a situation.

A frame is the mental window through which we view the world or a particular problem or issue (Harvard, 154). A frame influences how we see, hear, and interpret the world around us. Have you ever heard the expression, “If your only tool is a hammer, everything looks like a nail?” That’s an example of framing in action. In our previous example, Hans, the R&D manager, probably envisioned Project Dog Bone largely as a technical matter: “How can we pack a day’s worth of nutrition into a hard, bonelike product that will appeal to dogs?” Ray, the cautious CFO, surely saw the decision as a budgeting issue: “Where will we get $10–$12 million for this new project when so many of our current initiatives are begging for investment capital?” For her part, Jennifer saw the decision as a product-line issue: “This is one more product thrown into our current mix of canned and dry pet food; it’s bound to take sales away from our other lines.”

Because of their different training and professional responsibilities, each of these characters in our story approached the matter with a different frame of reference.

Communication among participants is the best way to overcome the framing problem. Each participant should explain to the others how he perceives the issue and why. The others should listen and learn from what is said. As each party to the decision learns about the perspectives of his colleague, he will form a more complete and realistic understanding of problem, issue, or opportunity. Had this been done in our story, the various participants probably would have developed a broader, more nuanced understanding of the decision that Hans brought before them. It was, in fact, a technical, financial, and product-line problem. They would then have to determine whether the technical issues could be overcome, whether the new product would be financially successful, and what that success would do to their product-line strategy. The answers to these questions would inform the final decision.

STEP 2: CONSIDER THE CONTEXT OF THE DECISION

Once you’ve defined the problem or decision correctly, the second process step is to consider its context. What is driving the problem or decision? Is it part of a larger issue? For instance, in the Project Dog Bone case, decision makers should inform themselves of the broader business surrounding Hans’ proposal:

• Is the market for dog food declining, stable, or growing?

• What are the key competitive factors?

• How profitable is the company’s current line of dog foods?

• Is the dog food business strategically important to the company’s future?

Once they understood the context of the proposal, participants would be in a better position to ask probing questions:

• Does Hans have the human resources needed to take on this project?

• If he began work on Project Dog Bone, would another project, perhaps of greater importance, have to be pushed to the sidelines?

• Would success in the project open the door to other opportunities for the company?

The answers to these and similar questions would provide context for the decision.

STEP 3: CREATE AND EVALUATE FEASIBLE ALTERNATIVES

Have you ever proposed something to your boss or a friend and had that person come back the next day to tell you that, “I like your idea. It got me thinking about a different way to approach the same problem—one that may work even better!” This is an example of creating alternatives.

Alternatives enrich possibilities for decision makers. Decision makers always have a minimum choice: they can say “yes” to a course of action, or say “no” and continue with the status quo. But yes and no are limited possibilities. Possibilities can often be expanded when the “right” people, as described earlier, put their minds around a problem or decision. Informed people and people with a stake in the outcome can often find alternatives that are superior to the initial proposal. In the Project Dog Bone case, for example, someone in the company’s pet food manufacturing unit might have altered the proposal by suggesting that production be outsourced to a contract manufacturer, thereby lowering the capital cost of the project and its risks to the company. Ray, the CFO, would surely see this as a superior alternative. Likewise, Jennifer’s concerns about resistance from supermarkets might be allayed by an alternative that produced “private label” versions of the product for big supermarket chains operating in different markets.

Your goal in this step should be to create a manageable set of feasible alternatives. By manageable, we mean few enough in number that process participants will have time to fully evaluate them. In most cases that would be three to six alternatives. By feasible, we mean realistic possibilities—within the capabilities of the company.

Brainstorming as a Method

One of the best ways to create a manageable set of feasible ideas is to bring the right people together to brainstorm the issue. Brainstorming is a method of soliciting ideas from a group of individuals in rapid fashion. It doesn’t challenge participants to be logical or fact-based, nor does it examine ideas as they emerge. It’s an opportunity for people to generate lots of ideas quickly. Out of this collective idea dump, good decision or problem-solving alternatives sometimes emerge.

Brainstorming participants should observe four basic rules:

• Seek quantity. What you want here is lots of ideas. Out of many ideas a group is bound to generate some very good ones. Worry about that later.

• Don’t criticize. Criticizing will make the stream of ideas dry up. Besides, at this stage, who can say if a top-of-the-head idea is good or bad?

• Welcome even far-out ideas. Face it, real change comes from far-out ideas, not ideas that are marginally different than the ones you have now.

• Find ways to combine and improve ideas. This is the last part of the process. You want to combine similar or complementary ideas into a manageable set. More on this later.

Here’s how a brainstorming session generally works. A session leader, or facilitator, asks people to suggest the ideas or problem solutions that occur to them at the moment. As each idea is contributed from the floor, the leader writes it on a flip chart, or a sticky note that gets pasted to the wall, or some other medium of recording. The leader should courteously thank each contributor but avoid passing judgment on individual ideas in any way, such as, “Come on Frank, you can do better than that.” Nor should the leader disqualify any offered idea, “Thanks but no thanks for that one, Judy.” Judgmental comments like these will reduce the number of ideas volunteered from the floor.

Once people run out of ideas, the session facilitator asks participants to help her group submitted ideas into clusters of similar ideas. This is one of the reasons that sticky notes are so handy in these sessions; they can be moved around readily. Only after grouping ideas do people get down to evaluating the merits of each.

Evaluation

This is another key information-gathering phase of the process, in which ideas are “fleshed out” with information. Let’s suppose that by brainstorming, the Project Dog Bone team came up with the following set of alternatives:

• The initial concept: a one-day dog food ration shaped like a bone.

• A package containing two smaller bone-shaped meals, one for breakfast and one for dinner.

• A package containing one small bone-shaped meal for breakfast along with a sealed bag containing soft, chew “kibble” for the dog’s dinner.

• Small bone-shaped portions packaged in a 20-pound bag. “That way,” says its advocate, “we won’t have to produce and inventory separate small, medium, and large dog versions. One bone would constitute a small dog’s daily ration, two would satisfy the medium-sized dog, and three or more would take care of the dogs over 70 pounds.”

• Do nothing. The status quo is almost always a feasible alternative—one against which the pros and cons of other alternatives can be measured.

Once the set of alternatives is selected, participants should do a thorough evaluation of each option. In order to make a sound decision, the decision criteria must be discussed and agreed on by the participants. Using criteria helps the group make an objective, well-thought-out decision, and provides a rationale for why the decision was made. The ability to rationally explain your decision helps you win the support of those whose approval you need. Examples of criteria include cost of implementation, return on investment, resources required, percentage of needs met, and so forth. In the case of Project Dog Bone, the final alternative, “do nothing,” might seem to require no evaluation, but it should be examined with the same rigor as the others. For this project, the team should provide the following information for the key decision makers for each alternative:

• A list of assumptions—a “must have” for decision makers whenever estimates of future outcomes such as sales and costs are forecasted. The assumptions may well be the same for all the alternatives: size and trends of dog food market, percentage of pet owners who work full time, shop in pet stores, and so forth.

• The estimated cost of implementation.

• Forecasted cash flow and accounting profits from the project.

• Likely pricing of the new product.

• Return on investment.

• Resource requirements (people, capital, and equipment).

• The likely strategic impact—for example, how will the new Dog Bone product affect the sales of the company’s canned foods? Will the new product open a new market?

• Likely competitor responses if the proposal succeeds—for example, would a competitor launch similar products? How long would it take them to launch knock-off products?

• Risks (of technical failure, of market rejection, of not gaining store shelf space, for example).

Some decision teams attempt to produce worst-case, best-case, and most-likely case scenarios for their alternatives. However they do it, the point is to provide decision makers with objective information and estimates for each alternative.

Evaluation should draw on the thinking of all the “right” people—people who know from experience what resources will be needed to implement the decision, people who have a good idea of what customers will pay for the resulting dog food, people who know how to estimate implementation costs and risks, and so forth.

Risk

Risk is a natural companion of every decision because its consequences unfold in the future, about which there can be no certainty. As a manager, every one of your decisions involves risk: Your decision to open a branch office in New Orleans in 2005 was backed by thorough research; who would have anticipated the disaster created by Hurricane Katrina? The new person you just hired has a great résumé and stellar recommendations, but only time will tell how successful she will be in the unique environment of your company. Every new hire is an experiment to some extent.

Decision makers must pay particular attention to risk. If the decision team has done its job, the risks involved in every alternative will have been spelled out in detail.

Those risks can then be factored into the final decision. As Admiral Chester Nimitz told the commander of the outnumbered U.S. Navy task force he sent to the decisive Battle of Midway in June 1942, “Take calculated risks. That is much different than being rash.” Taking “calculated risks” means accepting an alternative whose potential up-side benefits exceed its potential down-side costs. In other words, its potential rewards should exceed (at a minimum) any potential loss. The absolute worst alternatives are those with high risks and low potential rewards.

Make a list of every risk you can think of for key alternatives, then consider how each risk can be avoided or its impact reduced if it comes to pass. For instance, a new product often carries some risk of a personal injury lawsuit. That risk can be offset through insurance; the insurer assumes the liability risk in return for a premium payment. If the decision involves hiring a new employee, risk can be reduced by making continued employment contingent on good performance during a probationary period.

Because risk is always present, make it part of your evaluation of every alternative. Try to measure the probability of desired outcomes against the probability of something going wrong.

STEP 4: MAKE THE DECISION

Let’s see what happened to the Project Dog Bone team when Hans got a second chance to present his product idea, after a disappointing drop in cat food sales and a surge in dog adoptions by two-income families.

Hans first selected the “right people” who would have to be involved in all the steps. In addition to the members of the New Product Committee, Hans involved Greg from Manufacturing, Jorge from Packaging, Toni from Store Relations, and Susan from Market Research. Hans got a commitment from the New Product Committee members to participate in the discussions, not just rely on the research team to provide synopses of their work.

Then Hans worked to define the decision. After thought and discussion with his advisors, he realized that, like many decisions, this one was really several separate but related decisions. First, should the company introduce the Project Dog Bone product? If that decision was yes, then further decisions would need to be made about the possible outsourcing of manufacturing, packaging, and sales channels.

Next, Hans and the team considered the context, especially the growing pet food market and the shopping behavior of pet owners. As the team began to generate alternatives, people who had participated in the earlier exercise were in for a surprise. Because this time the decision had been framed as “Should we pursue a single-meal bone-like dog food product?” the alternatives had changed. This time, the alternatives were: Go with Hans’s original idea of a bone-like meal product; rethink the bone-like product as a dog snack; redesign the product concept as a “healthy teeth and gums” diet supplement; and do nothing.” (The variations on the product idea would be relevant only after the overall idea got approval.)

This time, the decision makers on the New Product Committee had enough information to make a rational, nonpolitical decision. Information on the context—the pet food market, the competitive landscape—led the team to evaluate the alternatives differently. They now understood that competitors would capture market share if the company did nothing. A new product offering would increase sales and could be positioned to minimize cannibalizing current sales. Of all the potential new product ideas, Daily Dog Bone Ration was the most promising.

Hans was thrilled when the New Product Committee came back with the decision to pursue Project Dog Bone and granted his team access to $1 million for the next stage of development.

STEP 5: IMPLEMENT THE DECISION

Though implementation is a different subject, it must nevertheless be part of any decision process. Decisions that approve a particular change or course of action should also include a plan for implementation. One of the virtues of the process described here is that it includes people who must live with the decision through its implementation. Their inclusion provides some assurance that an effective implementation plan will be developed and that the people who will execute the plan will be more committed to it.

As stated in the beginning of this chapter, the five-step decision process described here cannot guarantee a good outcome. Decisions, to a greater or lesser degree, involve uncertainty. Thus, it is very possible to make a good decision yet have a bad outcome. For managers, this is a fact of life and need not be a sign of poor performance, especially if the risks have been considered in advance. What is a sign of poor performance is a bad outcome that follows a bad decision—that is, a decision that was badly framed, that failed to include available information and the insights of the knowledgeable people, and that did not consider or evaluate feasible alternatives and their risks.

The well-being of an organization depends on the quality of its decisions. As a manager, you make many decisions and are responsible for their outcomes. All important decisions should be handled through a rational process that emphasizes fact finding and evidence gathering and leaves little room for power politics to exert influence. Though a good outcome cannot be guaranteed, a solid decision-making process can improve the odds of success and guard against second guessing and criticism in the event of a poor outcome.

Step 1, define the problem or decision correctly, ensures that the issue, problem, or opportunity being considered is presented in the proper frame of reference.

Step 2, consider the context of the decision, examines what is driving the problem or decision and reveals if it is part of a larger issue.

Step 3, create and evaluate feasible alternatives, provides for alternatives that enrich possibilities for decision makers. Informed people and people with a stake in the outcome can often find alternatives that are superior to the initial proposal.

Step 4, make the decision, follows when the issue, problem, or opportunity has been properly defined; information on the context has been evaluated thoroughly; and a range of alternatives has been considered.

Step 5, implement the decision, requires that a plan for implementation be in place for decisions that involve a particular change or course of action. Including those people who must live with the decision provides some assurance that an effective implementation plan will be developed and that the people who execute the plan will be more committed to it.

Generating alternatives and reducing risk are two other important components of effective decision-making.

1. A decision team should create:	1. (b)
(a) winning arguments.
(b) a manageable set of feasible alternatives.
(c) fall-back positions.
(d) rational and irrational choices.
2. Which is a natural companion of every decision?	2. (d)
(a) Complexity
(b) Confusion
(c) Conflict
(d) Risk
3. Decisions that approve a particular course of action should also include a plan for:	3. (d)
(a) customer feedback.
(b) pay raises.
(c) risk enhancement.
(d) implementation.
4. When complex decisions are being made, people with _____________________ should be involved:	4. (b)
(a) advanced degrees
(b) relevant information and experience
(c) no personal stake in the outcome
(d) a personal agenda
5. Good decisions are made through a(n) ________________ process.	5. (c)
(a) intuitive
(b) preferential
(c) rational
(d) aligned