Book excerpt: How leaders make decisions: addressing bias and risk in decision-making

Excerpt from Chapter 1 of How Leaders Decide: Tackling Biases and Risks in Decision-making by Harjeet Khanduja. Published with kind permission of SAGE Publications

Harjeet Khanduja

Management literature says: “Compare alternatives and select the best alternative”.

That sounds deceptively simple. Anyone can choose between two alternatives and still have a 50 percent chance of success. At this point, it’s as good as a coin toss. There are two problems with this approach.

First, decision making is not mathematics. A question I remember from my childhood was: If 4 people can build a wall in 10 days, how many people does it take to build it in 5 days? The intuitive answer was 8 people. That might be solid math, but at no point did we consider the process of building the wall. In reality, it could have taken 9 days to get government approval and the wall could have been built in a single day.

Second, real life offers no alternatives on the plate. Let’s say you are the CEO of a multi-billion dollar organization. Sales stagnate. You will get two options. Give customers a 20-30 percent discount or invest the same money in an advertising campaign. Who will you choose?

Suppose you choose the first option. You give a 30 percent discount and only your existing customers buy your product. In the end, the income drops by 30 percent. You might choose the second option. You spend money on advertising and sales don’t increase. That’s all the money that burned right there. Well, which one will you choose? What risk are you taking?

There could be a third possibility. Your dealer margins are slim. Maybe if you increase dealer margin, that could increase sales. There can be many options that have not even been brought to the table that have the potential to increase sales. Decision-making is often not about choosing an option. It’s about sensing an alternative not on the table that can solve the problem, however bizarre the solution may be at times.

Let’s up the ante on this issue. Imagine it’s 2012 and you’re making this decision for Nokia. None of the above options will work as the market has evolved into superior products and your product department has not caught up with this new trend of smartphones. The decision to invest in updating the operating system and functionality of Nokia phones should have been made 5 years ago when the iPhone was announced.

Nokia is a classic case. Even after Apple’s launch in 2007, Nokia had a 50 percent market share of all phones. In just six years, Nokia’s market share fell by 90 percent and the division was acquired by Microsoft in 2013. One wrong decision and a great company like Nokia gone from the cell phone market.

Organizational decisions are not easy. What makes organizational decisions difficult?

Sensing complicates decision-making in organizations

John and his wife, Alice Marriott, opened a root beer stand in Washington during the hot summer of 1927. The food naturally became part of the menu with the root beer. They eventually opened their own restaurant and then a number of Hot Shoppe restaurants. They were a thriving business in the 1950s.

In 1957, Marriot saw the Eisenhower administration building public highways. They sensed the chance that all these people who built highways would need a place to stay. At that time, the Marriott Group opened its first motel. Today, Marriott is the largest hotel chain in the world based on the number of rooms available. It has 30 brands in 131 countries and territories. If someone could have presented this alternative to other trading houses, they would surely have made the same decision.

Decision-making is about recognizing opportunities.

So the million dollar question is how do you take advantage of opportunities? The answer is simple. Whenever political, economic, social or technological factors (PEST) change in the business environment, it is a good time to evaluate business strategy and identify new opportunities. This can be done through a competitive analysis. Recognizing the opportunity for bottled water as a mass market product, Pepsi launched a bottled water business in India in 1994. Coca Cola didn’t feel it. However, they saw the success of Pepsi and entered the bottled water business in 1999.

But recognizing opportunities is not enough.

Identifying risks and threats is just as important to decision-making. Within months of the pandemic, Airbnb bookings fell 70 percent and ratings halved. Airbnb sensed this threat. Rather than wait for the pandemic to end, the company decided to reduce its reliance on the travel accommodation business and refocus on its core business of long-term rentals. This brought her back into business. Airbnb is now said to be the most valued hospitality company in the world.

Decision-making is also about recognizing risks.

Finally

Organizational decision making is different from just looking at a range of options and choosing the best one at hand. It’s about feeling the alternatives that are sometimes not offered at all. (L)earn more by reviewing the book for insights, tips, and techniques to improve your decision-making skills.

Check out the book on Amazon here

Published on

July 18, 2022

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