Strategy Talk with Christian Underwood and Prof. Dr. Jürgen Weigand
In the new episode Hope is not a strategy in Strategy Talk #15 "Decide strategically or by chance?" strategy consultant Christian Underwood and Professor Dr. Jürgen Weigand, Deputy Dean of WHU (Otto Beisheim School of Management) talk about strategic decision-making in theory and corporate practice.
Every day, people make 20,000 to 30,000 decisions. Some have only a short-term effect, such as coffee in the morning, while others last longer, such as moving in with a life partner. But how exactly does one make a decision? And when is it a tactical, operational decision and when does one act strategically?
In theory, decision-making according to the rationality principle is not that difficult. But what does it look like in professional practice? This is where cognitive distortions, noise, personal value sets and blind reliance on one's own experiences occur.
In this episode, Jürgen and Christian address all the big questions surrounding the topic of strategic decision-making. Can humans make purely rational decisions at all, or do they need a machine to do it? What influencing factors play a role in the decision-making process, and do humans ever have all the information they need to make decisions? Learn all this and more in the new episode Hope is not a strategy #15 "Decide strategically or randomly?"
Detailed episode description:
How many decisions are made every day
Humans make between 20,000 and 30,000 decisions every day. 90 to 95% of these decisions are automated. These include, for example, deciding whether to actually get up or what to have for breakfast. Routines are created in the subconscious that are practiced for a long time, but at their core they are still decisions that are made. In addition to these automated decisions, there are also the strategic decisions which have to be made.
Definition of the strategic decision
Strategy and also strategic decisions come predominantly from the military field. The term differs from the term tactical or operational decision. Operational decisions can be reversed in the short term. For example, you can still decide whether or not to drink a cup of coffee when the coffee machine is already running or the hot cup is in front of you. Strategic decisions, on the other hand, cannot be reversed in the short term.
Strategic decisions have consequences that play out over a period of time, and if the consequences aren't right, you can't easily make them obsolete.
Example: A man and a woman decide to move in together. They sign a rental agreement for this purpose, but after a few weeks they realize that the relationship has no future. Without further ado, however, they can no longer get out of the rental agreement. There are notice periods that must be observed, for example - whether they want to or not. This means that you have to consider in advance how stable the relationship is and whether it will stand up to this. Does it make sense to move in together at this point and sign a lease? Even if the consequences in this example only last three months, they are still longer-term consequences that cannot be reversed immediately.
Theoretical decisions according to rationality principle
Decision-makers in companies will never have all the relevant information they need to make a decision, so it is never possible to be aware of all the consequences in advance.
Economists work with the rationality principle. This means that decision-makers have all the relevant information at any point in time and are able to identify different options, compare them with each other and select the best option. In theory, this proves to be a very useful principle, which allows to draw certain conclusions that can then be compared and measured against reality.
In reality, however, decisions are seldom made rationally and all information relevant to the decision is never available.
Many choices complicate decision making
Normally, there is a rule of thumb: one has two to three options to choose from and decides on one here. The more options there are to choose from, the more difficult it becomes for people to make a decision. Empirical studies show that people, especially when buying consumer goods, tend to be overwhelmed with more than three options. It then becomes too complex, and in many cases the overload then leads to the abandonment of the purchase decision.
Experiential knowledge shapes tomorrow's decisions
Experiences from the past also shape and influence experiences and decisions today, which will have an impact on the future. Managers are often hired because they did a good job in a previous company and are expected to do it again in the same way in the new company. They then also usually implement this assignment.
Here, too, it must be noted that humans have formed certain routines in the course of evolution in order to survive. A routine is with positive experiences of the past to extrapolate that and to continue in the future. Humans think basically very linear, even if the connections in reality are not linear. Based on experiential knowledge, with the few observations that man has made himself, he thinks that if he adds only one point, then it works, but this is often not the case.
Updating particularly difficult in disruptive times
Particularly in disruptive times, as is currently the case, it is difficult to simply continue what has already been experienced. There are exponential processes, which are not linear.
One example is the Corona pandemic: Humans have learned that when there are more infections, events develop faster. Here, exponential growth takes place. Here, the heuristic for simplifying decision-making, namely linear thinking, reaches its limits and leads to errors.
So if people don't realize that something is exponential, they are more likely to make the wrong decision. This is called cognitive bias.
Thinking that the future will be similar to today or the past is a great danger for strategic decision making
Building the future on past experience is a typical problem on which basis the brain selects information. People are by nature little egoists and like to hear themselves talk and also like their own decisions - especially, of course, if they were also successful. The brain then selects exactly this information instead of considering that the future may look quite different from the past. Here it should actually be asked which deviations there are and which information differs. However, precisely this information is often ignored and dismissed as a "random result", while one continues to shimmy along the linear trend.
Personal values influence decision-making
Biases and value sets can also influence decision making.
Example: Behind conscious decisions, such as only living vegan and no longer buying food packaged in plastic, there is a conscious value. This can be that someone wants to protect the environment or make a value contribution so that the earth is still useful for people in the future. These personal values also influence decision-making. If there are different options to choose from and one option corresponds to the value system of an individual, then this individual will always prefer this decision, even though another option might be more economical or better.
Decisions in the direction of sustainability at companies
The topic of sustainability is currently a massive issue in the corporate world. Accordingly, other decisions are also being made here, for example about the product range.
Example food manufacturer:
A sausage manufacturer makes the decision to now also offer vegetarian product ranges under the same brand. Of course, this has a high explosive power, which is also felt in the own company. If meat is the company DNA and a vegetarian product range is now added, then this is an issue that also has an external impact. Decisions are then no longer made only on a factual or rational level.
Many human decisions are driven by emotions
Rationality is often equated with objectivity. But people are also emotional and many decisions are guided by human emotions, even if the decision-maker is not aware of this at the time.
Companies have to follow what customers want. If customer preferences change in such a way that it can be economical to follow these preferences - why not follow them?
To return to the sausage example: Such a company naturally has both the production capacity and the capabilities to offer a vegetarian product variety. So if the demand is great enough and you get the cost side covered, as well as making profits, then such a change makes a lot of sense.
New generation value set influences decision making in family businesses
The personal value set of the new generation in ownership influences the decision-making and ownership strategy in companies.
Example winemaker:
Many people currently want them sustainably produced products.
Among the winemakers, there are many family-run businesses that are now in their third, fourth or fifth generation. These now deliberately say that they only produce small batches, but ecologically and sustainably. Again, there is a great demand for this and therefore it is the right approach. Basically, companies should develop an understanding for this.
Based on the business model, business idea and value system, companies should be able to adapt according to the demand and then take it in hand and tackle it.
Value set, biases, and emotions significantly influence decisions.
Decisions and noise
In the recent book "Noise" by Nobel Prize winner Daniel Kahneman, noise is described as a decision-making factor in addition to biases and value sets.
Christian and Jürgen sit in a recording studio shielded from background noise.
Noise here would be, for example, things of everyday life or the ringing telephone.
If you are in the process of thinking about something or completing a plan and the phone rings, you could ignore it, yet this is not usually done. Such noise is distracting and also things that happen in such telephone conversations can capture people emotionally. When the conversation is over, the emotion is not over and the noise remains. This is then carried into the decision-making process. So noise is things that distract us from things that we actually want to focus on.
Research shows that people achieve completely different end results in decisions for the same facts.
This is a combination of the noise and the cognitive distortions. You look at the same facts, have the same data base, but the brains select different information. The human brain, if there is a preconceived notion, even if the person tries to ignore it, will select the information that supports the preconceived notion. This is exacerbated the more noise there is from the outside. Here there is an interdependence between what happens externally, i.e., the disturbance, and what happens in the mind by perceiving and processing a piece of information.
Can humans make good decisions or does it take the machine?
Humans can make good decisions, but whether the best possible decision is made is another question.
The rationality principle, which is used in economic theory, is an ideal state that is never reached. The ideal state would be complete certainty, in which one has all decision-relevant information and knows the quantitative consequences. As a rule, one does not have this in reality. It is then necessary to look at what this means for one, how far one is from it and which influencing factors have an effect on the decision-making behavior.
Support from external critics
To support the decision-making process in companies and to have a fresh view, one should seek external advice, present one's own decision set and ask how the counterpart would decide. The process is particularly helpful when asking especially critical people who like to put their finger on the pulse and doubt optimistic scenarios. Here one then receives a resonance sheet, can define for oneself where one is and what the consequences are of certain decisions one might make.
In the scientific context, peer review is used, but this is more difficult in the corporate sector. After a new strategy is in place, one can turn to consultants or other strategy experts.
Jürgen tells of an example in which he was commissioned by a larger company. Here, two large management consultancies were in competition with each other, both of which came up with proposed solutions. The company management sifted through these and brought Jürgen on board as a sounding board. There was enough material on which to base a decision. In such a case, Jürgen puts these decision proposals through their paces with his economic and strategic expertise. On the basis of what the consultations had produced and what his view of things was, the management made a final decision. These intensive discussions in the complete board, where every single detail is discussed again is very important.
Openness, self-criticism and external perspectives as success factors
Openness and self-criticism is an essential factor for successful decision-making. Everyone makes thinking errors that they cannot identify on their own. The more self-critical board members and decision-makers are, the more transparency there is in the company. You find out what the conviction behind individual elements is or how the interpretation of the situation is thought - that helps and is very decisive.
Neutral institutions, such as consultancies or individual consultants, may ask completely different questions that one would not have thought of oneself in one's own context, because one may have become entrenched here. Even board members, even if they have a lot of experience (as already mentioned: even experience can be dangerous) are not exempt from this problem.
At the end of every decision-making phase, there should of course be a decision. Here, one should then try to integrate many perspectives and to have considered everything in a 360-degree view. In terms of the strategy process: This is the 360-degree view of the strategy - what was discussed, what decisions are to be made, and why should the decisions be made as they are on the table.
SHOWNOTES:
WHU - Otto Beisheim School of Management
WHU Strategic decision making program
Contact :
Need help planning your strategy process? Feel free to email christian@underwood.de.
Thank you for your interest and until the next episode...
...Because HOPE IS NOT A STRATEGY.