STRATEGIC DECISION MAKING

STRATEGIC DECISION MAKING

These notes were taken at Rice University in a Management program  held in May 2011, that was conducted by Dr.  Vikas Mittal

When we make decisions, we usually do not think on the decision process, we focus on the outcome, and usually you have your mind set to justify the decision.

We think the decision is wrong because it was not what we wanted, instead to analyze the outcome.

Try not to be “hot headed”. Do not let your price interfere in a decision. Talk to other people before taking an important decision.

We all will make bad decision. The important thing is in average; most of the decisions are good.

Framing: Put you in one side or the other. Many times we get our minds “high- jacked” because the way the question was made:

Why is it critical for a firm to be a first mover in its industry? vs

Do you think first movers have an advantage?

How should we analyze a problem?

I should look all first movers and see how many made money.

Compare first movers to late movers.

Among all industries, there is a FIRST MOVER DISSADVANTAGE, for the first years. The newcomers capitalize in the mistakes first movers have made.

Pharmaceutical & Oil are similar: Huge investments, slow recoup.

One important factor to have success as first movers is to have financial muscle.

Availability Bias (Watch the famous awareness test from Daniel Simons and Christopher Chabris: "Selective Attention test" - http://www.youtube.com/watch?v=vJG698U2Mvo )

Availability in Action: Errors - More recent events are weighted more heavily!

Repetition: Works like advertising! “This is why you should never argue with your wife!” You are reinforcing the point she believes…

When using repetition: THE MESSAGE HAS TO BE VERY SIMPLE!

For example: use repetition for the one or to qualities that the company is looking for the next promotion! DEVELOP A GOOD REPUTATION. A GOOD IMAGE!

AVOIDING THE AVAILABILITY BIAS:

- Focus the meeting on the process we need to follow. “In the past when people did it like this, what happened was that…”

- Make scanning systematic: SWOT, 5 Forces, STP, etc

- Fill out every part in DETAIL supporting with evidence

- Consider past experiences. Always talk of percentages (Of the 50 times we tried, we were successful 10 times)

- Force yourself to think the negation case! If evaluating success, seek out for counter examples of failures

Vividness: Information is presented in a more vivid fashion.  Example: Toyota: People still do not feel comfortable buying Toyota, but they know that Toyota recalled all cars and fixed the pedal problem!

Confirmation Bias: Watching a 10 sec JC Penny advertising, and have someone start a discussion that the shirts had poor quality (Reinforce the quality by repetition) made a team evaluate the quality of JC Penny’s shirts on 9/10, compared to a group that did not see the advertising and were the group evaluated the quality in 5 over 10.

People are twice as likely to seek information that confirms what they already believe in.

“In networking focus more about other people, not only on promoting yourself. Also be natural: Do not fake interest”. Faking interest will bring confirmation bias!

How to avoid confirmation bias:

- Talk to at least two people with opposite points of views, preferably from different functional areas (Listen, listen, listen. Ask questions to fully understand their point of view. Understand the REASONING of the disagreement. Sometimes when you are listening, what you are really doing is “autobiographical listening”, you are in a defend mode (Preparing your defense)

- Meta – Cognition: Force yourself to list 10 reasons about what you are thinking is correct (Confirm). Now list 10 reasons about why  you think is not correct (Disconfirm). Its easy to come with 2 reasons, but very difficult to come with 10!

Strategies against Confirmation bias: DIRECTLY CONFROTING NEVER WORKS!!

- Mother in law effect: If you want to convince your wife on something, you should convince your mother in law. Convince someone else that the other person believes.

- Coalitions: When you talk to the people before the meeting. This could create less diversity of opinion in the meeting but help prepare your self. Be aware of the culture of the company. This could be seen badly in other companies.

Superstitious is confirmation bias!

You should pick all evidence, not just anecdotes…! Anecdotes are bias!!

Are you interested in people listening to you, or people changing their behaviors?

Proving people are wrong does not make people change the behavior. Avoid focusing on having to say your piece.

Decision Framing:

Frame presented as a Gain

a)    200 Win

b)   1/3 chance win 600 or 2/3 chance of loosing 600 M

People usually select a, but both are comparable.

Frame presented as a Loose

c)    200 Loose

d)   1/3 chance win 600 or 2/3 chance of loosing 600 M

People usually select d, but both are comparable, as is framed as a loose

If you win 10 $ small pleasure, if you loose 10$ they feel much more pain!

Customers do not get much happier receiving a little more gain! Invest were you reduce the pain (make sure that nothing goes wrong!) as people give more impact to negative.

Logic (Brain - Frontal lobe) is responsible for all decisions. Emotions can affect people’s decisions.

Negative Framing: William Sonoma had a “toaster” for 200$.

If you have a stock going down and you do not sell, you are avoiding to sell as it will be admitting your lose!

When a company is not doing well, they start to do high risk decisions.

Sunk Cost: Bad investments in the past. You should forget them when taking decisions.

Negative Framing. They ask your budget, and show you something much more expensive. Then they show you something at the level you have in mind. Now you are willing to invest.

Most people are loss averse! Negative framed information can induce more risk taking among decision makers.

Which risk should be managed?

Risk Severity = Probability x Impact (High, Medium, Low)

Manageable: Outside Control / Within Influence / Within Control

Risk Register:

Risk Event / Probability / Impact (days) / Severity (Impact x Probability) / Actions (Preventive / Trigger Point /Contingent)  // Risk Owner

Risk has multiple implications. Not only emotional:

·      Social relations

·      Reputation

·      Health Risk

·      Experience Risk

·      Sink the boat Risk (All vs Nothing)

Emotions & Decisions:

Emotions are not bad. The important issue is how you deal with the emotions Internally and Externally.

Emotions can improve the quality of the decisions. They play an important roll in the decision process: Emotions can Become motivational force: Too rational people can even delay the speed of simple decisions.

Felt emotions vs. Expression of Emotions.

Emotional Intelligence:

(1) Understand your emotional triggers,

(2) Managing the Emotions,

(3) Understanding what the other person feel.

“I just not to get Angry” is emotional unintelligence! No good… At the end you will explode!

What are your emotions: Anger, Sad, Fearful, Guilty, Trust, Ashamed, Happy, love…

·      Understand your emotional triggers

·      Understand how to express your emotions appropriately! Or how to hide your emotions? Your emotional expression has to be in control! Tell the other person WHAT made you get emotional (Angry), not WHY!

When you are getting emotional many times you are not aware. You can have an external person help you (Emotional support system)

Books on decision making:

·      Art of War: Translated in Modern Price

·      Tao te: Very Philosophical. Most virtuous quality is Humility. Most useful quality is being weak: Makes other people stronger! Applies to your children. Do not do everything for your kids!

Knowledge and humility: Knowing others is wisdom;Knowing the self is enlightenment. Mastering others requires force;Mastering the self requires strength;

He who knows he has enough is rich. Perseverance is a sign of will power.

Assumption & Presumptions:

Assumptions: Implicit Ideas we have about an issue.

Functional Assumptions: Finance, Marketing, HHRR

Non Functional: Culture, Power, Political

Presumption: My idea of what the implicit idea of the person is.

Round Robin Method: Everybody (Anonymously) writes their idea in a piece of paper, and then rotate each paper on all participants so they add feedback. After that, put all ideas on the board.

To become a good leader go from Advocacy to Inquiry

·      Concept of decision: From a Contest to COLLABORATIVE PROBREM SOLVING

·      Purpose of the discussion; From Persuasion and Lobbying to TESTING AND EVALUATING

·      Participants’ role: From Spokesperson to CRITICAL THINKER

·      Patterns of behavior:

o   From strive to persuade to PRESENT BALANCED ARGUMENTS

o   From defend your position to REMAIN OPEN TO ALTERNATIVES

o   From downplay weaknesses to ACCEPT CNSTRUCTIVE CRITICISM

·      Minority’s views: Discouraged to CULTIVATED AND VALUED

·      Outcome: From winners and losers to COLLECTIVE OWNERSHIP!

A common trap is UNDERESTIMATING HOW BAD COULD THE FUTURE COULD BECOME!

How to manage this:

Ask to imagine bad outcomes. Then ask how could they get to that bad outcome, and people will start saying scenarios to get to that outcome.