Winning Decisions: Getting It Right the First Time Hardback - 2001 - 1st Edition

CHAPTER 1

Setting the Course

Nothing is as frightening as ignorance in action. -Goethe

Let's begin with a quick experiment. You'll soon find that we, as educators and researchers, have a fondness for experiments. We encourage you to try these simple exercises whenever they appear. You'll learn more quickly the general principles we're trying to convey. More important, you'll learn about yourself and how you make decisions. Armed with that knowledge, you can better choose whether to replace your habitual approach to decision-making with some of the ones we suggest. And whatever the outcome of the tests...we promise: no grades.

Imagine you have in front of you two coins. Both are biased: coin #1 has a 55 percent probability of turning up heads; coin #2, a 45 percent probability of yielding heads. The coin you select will be flipped only once. If the head appears, you get $10,000 tax-free. If the tail turns up, you get nothing.

Coin #1: 55% chance of heads Coin #2: 45% chance of heads

Playing the odds, you choose coin #1. It's flipped... and lands tails up. You get no money. Curious to see what would have happened with the second coin, you flip it. It lands heads up.

Using a scale of 1 to 7 (where 1 is "clearly made a wrong decision" and 7 is "clearly made a right decision"), how good was your decision to choose coin #1? Answer:

Consider a second situation. You are the CEO and sole proprietor of a small company faced with the choice of promoting only one of two new products. Product 1 has a 55 percent chance of success, and a corresponding 45 percent chance of failure. Product 2 has a 45 percent chance of success, with a 55 percent chance of failure. If the product succeeds, you will personally receive an after-tax net profit of $10,000. If it fails, you receive nothing. Note that these probability estimates capture all the information that can be reasonably known at this time. They are based on market research, past experience with similar products, specific marketing plans for each product, a realistic estimate of the quality of the execution of those marketing plans, and a thorough consideration of such external factors as competitors' responses, the chance of an unexpected competitive entry, and so on.

You choose Product #1. It fails. However, Product #2, unexpectedly launched by your closest competitor, succeeds.

Using a scale of 1 to 7 (where 1 is "clearly made a wrong decision" and 7 is "clearly made a right decision", how good was your decision to choose product #1? Answer:

Did you give your decisions a score of 7, indicating that you made the best possible decision given the information you had? (You should have.) Or did the unsatisfactory outcomes sour your assessment? How you answered the questions above tells you an important characteristic of your decision-making. It reveals whether you evaluate the quality of your decisions primarily in terms of the process you used to weigh the alternatives and come to a conclusion or on the basis of the result you obtained.

When we ask this question in our executive education seminars, most people will agree that choosing coin #1 was the right decision, based on mathematical probabilities. But a considerable number refuse to rate the decision as 7 (excellent) or even 6, and some insist it was the totally wrong decision. They can't bring themselves to recognize a good decision process (choosing the coin that puts the odds in their favor) when faced with a poor outcome. When we put the question into a business context like the product launch, people are even more reluctant to rate the decision a 7 (only about half as many do as in the coin toss). The poor outcome weighs even more heavily on their minds.

PROCESS VS. OUTCOME

This outcome-focus among most decision-makers is not surprising. After all, most organizations reward--or penalize--people based on the outcomes of their decisions. Results are what matter. You are given a raise or bonus for being highly productive. You are offered a promotion when the projects you manage consistently turn out well, and passed over for plum assignments when they fail. This organizational preference for outcomes is understandable. It exists in part because outcomes are usually easier to assess and are often more objective than assessments of process. The new service you decided to offer, or the new product you decided to launch, proves profitable or not. The team you lead performs well, completing its task on time and within budget, or it doesn't.

The focus on outcomes goes beyond ease of observation, however. Many people believe that good outcomes necessarily imply that a good process was used. And they assume the converse to be true as well: that a poor outcome necessarily signals a poor or incompetent process. One division president we know captured this view starkly when he rhetorically posed the following question. "I can promote one of three people," he said. "One has a track record of 50 percent mistakes. The second, 25 percent mistakes. And the third, no mistakes. Who do you think I will promote?" He expected us to answer: the person with no mistakes.

Instead we responded with a question of our own: "How does an experienced manager boast of a track record with no mistakes? The only way we know to have a track record of no mistakes is to do nothing." In an organization where one mistake can derail a career and mistakes are judged only on outcomes, people become afraid to make decisions. They become afraid to do anything. Furthermore, if the track record is based on just a few big decisions instead of numerous smaller ones, a focus on outcomes carries the risk of rewarding good luck--or penalizing bad luck. A focus on process would, instead, allow him to truly find the most worthy candidate for promotion. Unfortunately, this executive was not convinced. We hope you, however, will be.

As consultants, researchers, and teachers, we are as pragmatic and results-oriented as anyone. We aim for good outcomes and are pleased when they occur. Throughout this book, however, we will argue that your best hope for a good decision outcome is a good decision process. That is because we believe that decision-makers must focus on what is actually under their control.

To better understand the process vs. outcome dilemma, consider with us where good results come from. Three things influence outcomes, or results:

(1) Deciding (the thinking and decision process),

(2)  Doing (implementation and other factors under your control),

(3  Chance (uncontrollable factors, luck).

By definition, you can't control those factors in the chance category (although you can seek to move more factors under your control and leave as little as possible to chance). And in contrast to the coin toss, the outcome in most real-world decisions depends not only on the quality of the decision process, but also on a mixture of implementation and chance that is difficult to disentangle. A good process, even when tied to excellent implementation, won't guarantee a good outcome 100 percent of the time. Bad luck happens to us all. But clearly, the closest to a guarantee of a good outcome is a good thinking/decision process followed by good implementation.

The Three Factors That Determine Outcomes

Fortunately, the organizational bias toward assessing only outcomes is beginning to wane. Robert Rubin, former treasury secretary of the United States, recently noted that "decisions tend to be judged solely on the results they produce." But he continued, "I believe the right test should focus heavily on the quality of the decision-making itself...It's not that results don't matter. They do. But judging solely on results is a serious deterrent to taking the risks that may be necessary to making the right decisions. Simply put, the way decisions are evaluated affects the way decisions are made. I believe the public would be better served, and their elected officials and others in Washington would be able to do a more effective job, if judgments were based on the quality of decision-making instead of focusing solely on outcomes. Time and again during my tenure as Treasury Secretary and when I was on Wall Street, I have faced difficult decisions. But the lesson is always the same: good decision-making is the key to good outcomes. Reject absolute answers and recognize uncertainty. Weigh the probabilities. Don't let uncertainty paralyze you. And evaluate decisions not just on the results, but on how they are made."

The person who uses a good decision process and is rewarded with a good outcome deserves the ensuing accolades. But someone who uses a good process and is met by failure deserves praise as well, for this person may simply have fallen prey to a bad break. Likewise, someone who employs a poor decision process but is met with world-class success deserves neither praise nor promotion for this fortunate individual is simply the recipient of dumb luck. Such luck happens, but you certainly wouldn't want to bet your career on it. You just can't count on luck alone. And so, we invite you to take a moment to reconsider your assessment of the two decisions at the beginning of this chapter. If you weren't able to assign yourself a 7 for clearly making the right decision, see whether you might be able to now. And then read on, as we show you what we have found to be the key elements of a good decision-making process. As Dwight D. Eisenhower said, "Plans are nothing. Planning is everything."

Lesson: Your best hope for a good outcome is a good decision process followed by good implementation.


A Good Decision-Making Process

Would you tell me, please, which way I ought to go from here? asked Alice. That depends a good deal on where you want to get to, said the Cat. I don't much care, said Alice. Then it doesn't matter which way you go, said the Cat. -Lewis Carroll, from Alice's Adventures in Wonderland

Unlike Alice, most of us do care where we get to, so it does matter which way we go. We need a coherent road map, designed to save us from end- ing up in the kind of topsy-turvy worlds that Lewis Carroll delighted in creating.

Dividing the decision-making process into four stages can provide just that needed guide. These four stages provide the backbone of almost any decision process, and consciously or not, every decision-maker goes through them. They are:

1. Framing: Framing determines the viewpoint from which decision-makers look at the issue and sets parameters for which aspects of the situation they consider important and which they do not. It determines in a preliminary way what criteria would cause them to prefer one option over the other.

2.  Gathering Intelligence: Intelligence-gatherers must seek the knowable facts and options and produce reasonable evaluations of "unknowables" to enable decision-making in the face of uncertainty. It's important that they avoid such pitfalls as overconfidence in what they currently believe and the tendency to seek only information that confirms their beliefs.

3. Coming to Conclusions: Sound framing and good intelligence don't guarantee a wise decision. People cannot consistently make good decisions using seat-of-the-pants judgment alone, even with excellent data in front of them. A systematic approach will lead to more accurate choices--and it usually does so far more efficiently than hours spent in unorganized thinking. This is particularly true in group settings.

4.Learning from Experience: Only by systematically learning from the results of past decisions can decision-makers continually improve their skills. Further, if learning begins when a decision is first implemented, early refinements to the decision or implementation plan can be made that could mean the difference between success or failure.

In real life, of course, the process is not quite as linear--or as distinct--as our four stages suggest. Indeed, information discovered in the "intelligence-gathering" stage may inspire you to go back and reframe your decision. Moreover, a complex problem (the relocation of your business, for instance) may entail a series of smaller decisions, each of which may involve several framing decisions, several intelligence-gathering efforts, and several coming-to-conclusions steps.

In spite of this inherent complexity, it helps to think about each of these activities of your decision separately. You can't guard against the characteristic errors of each stage unless you learn to recognize which part of the decision you are working on at any given moment. Fortunately, avoiding these errors is easy once you have learned to recognize the stages and their common traps.

Our four-stage process is a framework, not a series of rigid rules. Follow the paths we suggest only as far as you feel is required for the decision at hand. Use them flexibly. Be aware, however, that every good decision-maker must go through the first three stages. They will happen with you, or without you, poorly or wisely, controlled or ad hoc. If you skimp on the stage crucial to the issue you face, you will pay the price. You can manage these stages now, or they can run over you later.

Four Stages of the Decision Process

Note that the first two stages are primarily expansive. In them, you will be trying to expand your options, challenge your assumptions, add to your knowledge, and diversify your interpretations. In contrast, the second two stages are primarily convergent. You will be trying to narrow in on the preferred option and summarize your learning into a few pithy lessons for the future.

J. EDWARD RUSSO, PH.D., is a Professor of Marketing and Behavior Science at Cornell University's Johnson Graduate School of Management. He has served as an adviser to such companies as Boeing, Eli Lilly, General Motors, Harris Bank, and SmithKline Beecham. Russo is also actively involved in the study and application of leading-edge decision technologies to real-world problems and is a frequent speaker in executive decision programs. He is the co-author, with Paul Schoemaker, of Decision Traps. He lives with his family in Ithaca, New York.
PAUL J. H. SCHOEMAKER, PH.D., is the founder and Chairman of Decision Strategies International and Research Director of the Mack Center for Technology and Innovation at the Wharton School. He has consulted with about a hundred organizations, including a two-year sabbatical with Royal Dutch/Shell's scenario planning group in London. Schoemaker has been a professor at the University of Chicago and the Wharton School, and a frequent speaker in various executive programs, including those at Berkeley and Cedep at Insead. He lives with his family in Villanova, Pennsylvania.