Decision Management – Is knowing that you’re right or wrong enough?

Click this link if video player does not open.

No. 3 in the Getting Started series.
This article is a transcript (with slides) of the video.

If you’re a manager or executive then you earn your paycheck by making decisions. Most of us believe we’re good, if not excellent, decision makers. We base this assessment on several things, most of which equate to some measure of how often we’re right vs. wrong. Today I want to show you a different way of looking at decisions, one that I believe can help you assess what’s going on in your business.

Understanding Decisions intro slideDecision making is an important part of Competitive Thinking, and over time we will look at them from several different perspectives. Today I’d like to show you a framework that breaks business decisions into four major types and illustrates why they are important. I believe you can use this model to assess your decision-making and gain some valuable insight into what’s happening in your business.

Before we start keep in mind that this framework applies equally from line managers all the way up to senior executives. The details and scope of decisions may vary, but the underlying structure is the same.

Let’s begin with a simple chart. We’ll graph time across the bottom and on the left we’ll graph impact. Impact can be capital costs, risks associated with failure, potential revenue increases/losses or some combination.

In the lower-left quadrant are Incremental decisions. These are everyday choices about operations, execution, and continuous improvement, which affect how you do what you do. These decisions might take a few weeks, months, or quarters but generally play out in less than a year. All of the Lean Manufacturing, Six Sigma, Total Quality Management, Continuous Improvement and other such programs usually fall into this category, as do staffing, budgeting, etc.

Strategic value ranges from low to moderate and the cost-risk-revenue changes are usually relatively low, but almost every manager will spend some portion of each day on decisions like this. The goal is to minimize the time spent on these decisions through the use of systemization and automation.

4 Decision TypesThe danger with incremental decisions is that because they are relatively easy, and ubiquitous, they can gradually absorb all your focus and prevent you from doing the important things.

On the lower-right we have Migration. I use this term specifically to indicate movement. In a migration decision you may be going into adjacent markets, having identified a customer segment who use your product in slightly different ways or conditions but share many similarities with your current market. For example you may sell the same product to both irrigation system builders and fire suppression system builders, or to rock climbers and Jet Ski riders.

Or you may be combining two or more existing products or services in a new bundle or configuration that serves existing customers in new ways. Or you may just be doing research looking for opportunities.

These decisions could have a high revenue impact but the costs and risks are usually low to moderate because you are not doing anything truly new. Migration decisions usually some require longer-term planning and thinking ahead – more than 12 months from conception to results.

In the upper right are Strategic decisions. This is where you make a real difference in your future – by deciding how and where you are going to be unique. Such decisions include launching new products or new brands, entering completely new markets or new geographic territories.

Strategic decisions are the source of true innovation and differentiation. As such the capital costs and risks of failure are usually quite high. These decisions can take 18, 24, even 36 months to play out and, if you’re going to succeed, require considerable planning for the future and an emphasis on external forces.

The last category is Reactionary. These are decisions that have to be made because you have no other choice – you’ve had some sort of major surprise, your previous plans aren’t performing, or maybe you just put off a major decision and ran out of time.

This is the type of decision you want to avoid at all costs. It means something has gone wrong. Reactionary decisions are the ones that result in liquidation of assets, layoffs and reorganizations. In the worst cases, maybe even bankruptcy or shutting the doors. Yet, if you spend all or most of your time on incremental decisions you will eventually end up here by default.

Internal vs External DecisionsAnother way to think about this is Internal vs. External. If you’re spending all your time on the short-term, left side of the graph you’re focusing almost exclusively on internal information – what resources do you have, what can you do, how quickly can you act, what results are you achieving.

Almost all the data you need to make these decisions comes from internal sources. And it is easy to bury yourself in Business Intelligence and financial analysis right up to the point that the bankruptcy trustee comes in.

In contrast, if you are focusing on the longer-term, right side of the graph you will need the appropriate external data and good perspective on what it means. You will be focused on the key external forces that affect your potential for success.

Survival vs Success DecisionsAnd that leads us to the ultimate distinction between the decisions – survival vs success. If you are spending all or most of your time on the left side of the graph you’re probably in survival mode – making decisions that are necessary but not sufficient to grow your business, and being reactive to threats.

Long-term success requires that you move out of survival mode. One of the best ways to do this is to begin using Competitive Thinking to help your organization understand the importance and impact of external forces and make decisions that minimize the risks and take advantage of the opportunities those forces create.