Author: Joshua Seedman
Table of Contents
Executive Summary
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Volatility is the new normal with speed rather than size being the real competitive advantage. Thus, to keep pace with the ever-quickening innovation cycles, organizations must make decisions more quickly than ever while ensuring speed does not compromise quality. Unfortunately, poor decision-making is often the number one greatest driver of value destruction and plagues even the world's most admired companies. Much of this value destruction stems from the fact that most enterprises fail to have any decision-making and/or strategic planning process in place to guard against value erosive decisions. According to a finding from McKinsey & Company, enterprises without any decision-making and strategic planning processes are twice as likely to generate extremely poor results as extremely good ones, often failing to achieve even 75 percent revenue expectations.
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Perhaps one of the greatest contributors to poor corporate decision-making is the failure to consider the entire decision-making lifecycle. This ultimately leads to stagnant growth, poor productivity, diluted resources, and declining profitability. Simply, this stems from a corporate decision-making gap™ (See Exhibit 1). Indeed, this gap is often the number one culprit for why companies fail and/or see stagnant growth. Consequently, left unchecked, corporate decision-making gaps quickly grow and can (1) undermine enterprise decisions from the top-down, (2) create a toxic culture, (3) lead to stagnant growth, and (4) drive negative ROI. However, on the opposite side of this spectrum, a competitive advantage will accrue to companies who have a structured process that allows for quick, flexible and sound decision-making, including ROI increases of 7 percent and greater. Simply, decision-making can either be value erosive or value maximizing. This article proposes a new methodology for closing this value destructive gap, namely (1) 360° omni-stage™” decision-making model (See Exhibits 1 and 2) and (2) a six phase decision-making transformation framework (See Exhibit 3).
The Cost of Poor Decision-Making
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Left unchecked, poor decision-making will undermine revenue and profits. In a recent McKinsey & Company survey of 772 board members, including over 200 chairmen, respondents ranked "improving decision-making" as their No. 1 aspiration for how to improve their performance. Yet, according to behavioral economists, very few companies implement measures to combat poor decision-making. This ultimately leads to value erosive decisions that deviate from rational calculations. Indeed, behavioral economics indicate that corporations and its leaders are often not rational as decision makers, and that this irrationality is quite predictable. Furthermore, Nobel Laureate Daniel Kahneman has demonstrated how biases lead to sub-optimal value eroding decisions – decisions that are diametrically opposed to the rational choices assumed by classical economics.
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For example, companies that exhibit a greater number of biases (i.e., poor decision-making) are 32 percent more likely to pass up good investments. In addition, poor decision-making can decrease the returns on a company’s investments by 31 percent (See Exhibit 4). According to a recent McKinsey & Company survey, 72 percent of senior-executive respondents believed bad decisions were as frequent as good decisions. In another McKinsey survey, only 28 percent said that the quality of strategic decisions in their companies was generally good. On the opposite side of this spectrum, those that improve their decision-making from the bottom to top quartile can witness at least a 7 to 9 percent ROI increase and sustainable revenue growth (See Exhibits 5 and 6). Simply, decision making can either be value erosive or value maximizing with many companies unknowingly taking the path of value erosion. The following sections outline how companies can think about improving their corporate decision-making, thereby substantially improving both top and bottom line growth.
Why Poor Decision-Making Is So Prevalent in the Corporate Landscape
“The number of steps involved across any decision-making lifecycle is often far greater and requires more in depth rigor and analysis than most companies consider. Many merely analyze each step as they move through the process but only go as deep as they should once they come to that juncture or are confronted with a pain point, at which stage it is too late.”
Situation
Poor decision-making is a far too common problem, with examples including the notorious M&A “winner’s curse,” poor digital transformation ROI, and increased customer pain points after lengthy enterprise turnarounds. These problems often occur because the number of steps involved across any successful decision-making lifecycle is often far greater and requires more in depth rigor and analysis than most companies consider. Many organizations merely consider each step as they move through the process but only go as deep as they should once they actually come to that stage or are confronted with a pain point. By this stage it is likely too late as much of the value destruction levers have already gone into motion. Simply, a linear trajectory is followed which is equivalent to someone walking along a sidewalk with tunnel vision. They only see what is ahead and course correct once they arrive at a problem in the road or fall into a ditch. This stems from a “multi-stage” instead of a "360° omni-stage™" decision-making mindset.
“Companies often get so focused on the potential end prize that groupthink, poor employee empowerment leading to “yes” people, emotional escalation, egos, tunnel-vision, cultural misalignment, data gaps, and biases get in the way of value maximizing decision-making.”
COMPLICATION
A byproduct from this lack of analysis and rigor within the decision-making lifecycle is stagnant growth from unsuccessful initiatives such as failed acquisitions, poor transformations, slow time to market (i.e., lost opportunities and market share), and biased decision-making. This is more prevalent than ever with over half of the S&P 500 predicted to be out of business within the next decade. Such outcomes occur because companies often get so focused on the potential end prize that groupthink, poor employee empowerment leading to “yes” people, emotional escalation, egos, tunnel-vision, cultural misalignment, data gaps, and biases get in the way of sound, value maximizing decision-making across the entire decision lifecycle. Simply, value erosive, “multi-stage” decision-making occurs because the enterprise thinks through each stage in a linear, one-dimensional fashion instead of in a holistic, "360° omni-stage™" approach (see below).
360° Omni-Stage Decision-Making™
- Unlocking Value Maximizing Decisions -
Linear decision-making destroys value because it does not take into account the entire decision-making lifecycle. On the other hand, a 360° Omni-Stage Decision-Making mindset unlocks value by taking into account past, present, and future (PPF) data (See Exhibits 7 and 8).
Exhibit 7 (Click to Enlarge)
Solution
Making profitable corporate decisions can be analogized to a 1x1 matrix. Simply, companies must find the right balance between (1) the evaluation of the number of relevant value defining steps in the lifecycle of the decision (i.e., Y-Axis = % of Lifecycle Analyzed) and (2) the depth of analysis for each relevant point (i.e., X-Axis = Depth of Analysis). This can be accomplished by analyzing the journey from a 360° omni-stage view via (1) past learnings, (2) current considerations and pain points, and (3) future issues that could arise. This 360°omni-stage lens ensures that at any point in time companies are analyzing the entire journey via a 360° view, improving the likelihood of value-unlocking decision-making.
Exhibit 8 (Click to Enlarge)
This 360° omni-stage model covers the complete decision-making lifecycle by transitioning companies from a multi-stage, one-dimensional, and linear timeline analysis to a three-dimensional journey evaluation. This is accomplished by taking a holistic 360° view of (1) past, (2) present, and (3) future (PPF) data points. Firstly, hindsight is 20/20 making “past” analysis of failures and successes imperative as historical records are one of the few “certain and concrete” pieces of data at a company’s disposal. Secondly, an enterprise bottoms-up approach (i.e., frontline on up) is needed for “present” day analysis because only in this manner will an accurate, real-time pulse of the customer, market, and product be revealed. Finally, a future driven, pre-mortem, and predictive analysis of the decision-making lifecycle should be performed.
Exhibit 9 (Click to Enlarge)
By taking this holistic data analysis covering (1) past, (2) present, and (3) future (PPF), key insights will be gained that will aid in value maximizing decisions. Simply, once complete, this 360° omni-stage approach of PPF analysis will give the necessary learnings, insight, and foresight to drive decision-making that exceeds rather than simply meets market and customer expectations. While perhaps easy sounding in principal this journey is not for the faint of heart and requires adoption by the entire enterprise. To aid in this process, this article proposes a six step transformation journey framework which can help any company in its decision-making turnaround (See Exhibit 9).
6 Phase Transformation Journey
1. Identify existing decision-making pain points, map out decision-making structure, and analyze root-causes, including value destructive biases
2. Determine gaps and misalignments across business units, analyzing current and past decision-making outcomes to inform key patterns
3. Evaluate what metrics are in place for tracking the success or failure of each key decision-making lifecycle
1. Run company wide focus groups to determine internal pain points that hinder organizational health and value added decision-making
2. Redesign the culture via an inside-out, bottoms-up approach (read more HERE)
3. Run constant employee surveys (eNPS) to ensure increased engagement - a strong indicator of empowerment, psychological ownership, and a healthy culture, all keys to value added decision-making
1. Select best practice decision-making levers that are pertinent to each BU and key decision-making scenarios
2. Redesign the decision-making system through the selection of relevant countermeasures and playbooks to target identified biases, account for basic pitfalls, and ensure key KPI’s are met or exceeded
3. Devise a playbook and data scoring models for each major decision-making scenario
1. Create a company wide war room, aligning key decision makers into a clear governance and execution model for piloting of new system
2. Institutionalize new decision-making platform through capability building via train-the-trainer protocols, feedback mechanisms, and continuous audits
3. Establish ongoing decision-making capability building that is tailored to each BU and shifting business needs
1. Establish performance expectations that rewards sound decision-making adoption across BUs and mitigates biased decision-making (e.g., groupthink)
2. Define actionable tracking metrics to ensure decision-making is driving both short and long-term success
3. Manage decision-making portfolio via PMO creation, ensuring past, present, and future decision-making analysis and due diligence are being performed
1. Create an enterprise score-card for company wide focus and alignment, enabling collaborative performance dialogues among business units and employees (from the bottoms-up)
2. Manage change management conflict, culture shift, and decision-making results throughout adoption lifecycle
3. Monitor progress via eNPS trends, enterprise KPI's, decision-making ROI analysis, and external benchmarks
Conclusion
“Volatility is the new normal with speed rather than size being the real competitive advantage. Thus, winners will be those that have a structured process that allows for quick, flexible and sound decision-making. ”
Poor decision-making plaques even the world's best companies. Over time this equates to a plethora of value destructive issues including but not limited to: (1) strategic plans that ignore competitive responses, (2) groupthink that destroys innovation, (3) poor culture that lacks engagement, (4) large investment projects that are over budget and over time, and (5) transformations that end up using enormous amount of capital with little to no financial benefit. Compounding this dilemma is that volatility is the new normal with speed rather than size being the real competitive advantage. Simply, in order to keep up with the ever-quickening innovation cycles, organizations must make decisions and roll out new initiatives more quickly than ever. For many organizations, a three to five-year strategic plan represents an antiquated methodology.
Thus, in this dynamic and fast-paced environment, winners will be those that have a structured decision-making framework in place that allows for quick, flexible and sound decision-making. Finally, any decision-making transformation should take a 360° omni-stage approach that covers the complete decision-making lifecycle. Simply, a transition from a one-dimensional, linear timeline analysis to a three-dimensional journey evaluation should occur. This is accomplished by taking a holistic, 360° view of (1) past, (2) present, and (3) predictive future data points. This model should be leveraged cross-functionally by the enterprise to ensure value-added decision-making at any point in the decision-making lifecycle. While the behavioral-strategy journey requires top-down commitment across the entire enterprise, the payoff makes it one of the most valuable strategic investments any organization can make.
Case Studies
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ABOUT THE AUTHOR
Joshua Seedman is the founder and chairman of PNI Consulting, a management consulting firm that specializes in global transformations. He has over 20 years of operating and general management experience with expertise in organizational transformations, customer experience, employee engagement, digital transformations, sales & marketing, operational turnarounds, culture/change management, and high-stakes negotiations. His experience includes executive roles within F500 companies, top-tier consulting leadership (McKinsey & Company), over 10 years of global P&L responsibility, and corporate lawyer (Davis Polk & Wardwell). He received his MBA from Kellogg School of Management and his Juris Doctor (cum laude) from Northwestern University School of Law.
