Decision Making In Uncertainty

By Liri Andersson, Business Consultant, CEDEP Faculty and Programme Director, Decision Making

Decision making has always been a fundamental leadership responsibility, and since the beginning of organisations, sound business decision making has been at the core of financial success and operational longevity.

Until recently, business leaders operated within a stable economic environment, with predictable competition and subdominant customers. As a result, strategic choices were limited and companies benefited from lengthy windows of opportunity and product lifecycles.

In times of economic stability, leaders operate in the known, and optimisation – the process of improving an organisation’s efficiency, productivity and performance – is the main focus of sound business decision making. The decision making process reflects this in terms of:

• How decisions are made: Decisions are based on the assumption that nothing fundamentally changes. For example, strategic planning focuses on reviewing and revising last years’ plans. Incremental budgeting takes previous years’ figures and adds or subtracts a percentage to obtain the current years’ budget.
• Who makes what decisions: There is a clear separation between strategic decisions, decisions for execution, and decisions for operations. Strategic decisions guide the organisation’s direction, and are made infrequently by senior management. Tactical decisions, necessary for successful execution in the short to mid-term, are made regularly by middle management. And finally, operational decisions are made daily by junior management. 
• Attitude towards risk: In a stable environment, appetite for risk is low as there is no need to challenge what, why or how the organisation does what it does.

Optimisation is appropriate in a predictable world where the focus is on exploiting past and present success. Optimisation however, will not give companies an edge, nor will it ensure future relevance once the organisation operates in the unknown.

A shift towards discovery

Today’s global uncertainty is making business decision making harder and riskier. Business leaders have to navigate an unstable business environment driven by globalisation, political instability, environmental crisis, digitalisation, with unpredictable competition, and empowered customers. As a result, big trends are numerous, hard to detect and strategic choices unlimited.

Today’s leaders are forced to operate in the unknown, constantly facing new challenges. How will global changes impact consumers’ needs and expectations? How will technology impact business and industries? How will value be created, distributed and captured? What business models will make sense? Who will we be competing against, and who will we need to collaborate with? The past is not a suitable guide to answer these future facing questions. It is no longer enough for organisations to focus solely on optimisation.Instead, to find answers to these business critical questions, companies must also explore through discovery.

This uncertainty is making decision making infinitely more complex, decisions need to be made more frequently, at unprecedented speed and involving higher risk. Moreover, strategic, tactical and operational decisions are merging, and there can no longer be a hierarchical separation within an organisation between who makes what decisions.

Strategic decision making: a core capability

In uncertainty, to avoid optimisation, which is by default embedded in organisations,the decision-making process needs to be transformed and modernised. Strategic decision making driven by discovery must be entrenched within an organisation, and decision making treated as a core capability.

Decision making process in uncertainty

So how can this be achieved?

The following four steps will help business leaders make the most relevant decisions in times of uncertainty.

1) Rewire minds for success

To operate effectively and efficiently, humans develop mental models – lenses through which we see the world, including the way we think, the opinions we form and the things we accept as true, or as certain to happen without proof. To help us better navigate through life, mental models programme our minds to think and act in a certain way

However, to remain relevant in an uncertain world, mental models must constantly be challenged and enhanced. To be successful, corporate leaders need to understand how the world is changing, what this means for business and the organisation – and based on this knowledge, expand on mental models, or develop new ones. Hence, to discover as well as optimise, business professionals’ minds and comprehension must be continuously rewired.

For example, when Satya Nadella was appointed Microsoft CEO in January 2014, the company, wedded to its proprietary products, was heading towards irrelevance, However, a mental shift allowed the organisation to see the power of cloud and mobile, leading them to embrace open source and a cloud-based subscription business. Microsoft made a remarkable recovery, reaching a $1 trillion valuation within five years.

Questions for business leaders:

• What mental models have made my organisation successful to date, but may not ensure the same success in the future?
• What realities, mindset, assumptions, accepted norms and natural biases are we operating from that would benefit from being challenged?

2) Define the problem for discovery

The first step in decision making, both for optimisation or discovery, is to define the problem in clear and concise terms. Good problem statements result from a deep understanding of the challenge or opportunity the organisation is facing, coupled with identifying the right question to be answered.

The majority of business decisions made by organisations today focus on achieving optimisation, not discovery. Hence, problem statements created by their leaders concentrate on minimising production costs, maximising revenue, increasing productivity, and improving efficiency.

Kodak can help us understand the difference between a problem statement focused on optimisation, and one on discovery.

The name Kodak was once synonymous with cameras and film. In 1976, 85% of all film cameras and 90% of all film sold in the US were Kodak. With this success in mind, it is reasonable to assume that Kodak, in the 80s, defined its business challenge something like: How can Kodak increase film sales by X% and camera sales by Y%?

The likely outcome of such a problem statement is that sales increase by adopting optimisation strategies such as; increasing advertising budget, decreasing price, hiring more sales staff, expanding distribution networks and so on.

However, imagine a scenario where Kodak’s leaders recognise the world has changed. They expand their mental models, which allows them to realise that products on their own are not enough to remain a market leader as services and emotions matter greatly to consumers. Leadership concludes that they are not sure what products and services will truly resonate with consumers moving forward, nor do they know who their future customers will be.

In this scenario, discovery is required and the problem statement would have to be adapted to something like: How might Kodak celebrate people’s lives by helping them capture special moments and facilitate remembering and sharing?

In this world, Kodak may have gone ahead with launching the digital camera they invented in 1975, and it is not unrealistic to think that the company could have gone as far as creating Facebook.

Questions for business leaders:

• Is my problem statement inward-focused on solving an internal company-specific problem?
• Or, does my problem statement express a human-oriented problem to be solved through a solution, that leads to an important outcome for the customer?

3) Select information that allows for discovery

Information is like fuel: what you put into the system will dictate what comes out. If an organisation is looking to discover, ideation and decision making needs to be fuelled with different sources of information than traditionally used by the organisation, or its competitors.

Let’s look at Kodak’s problem statements again. Focusing on optimisation, the following information would be needed to design a strategy aimed at increasing the sales of film and cameras at Kodak.

• Key film and camera producing companies and market share.
• Quantity of films and cameras sold per year.
• Distribution networks of film and cameras.
• Customer analysis – who is most likely to buy film and cameras.
• When most film and cameras are bought.

However, if Kodak focused on answering the question, “How might Kodak celebrate people’s lives by helping them capture special moments and facilitate remembering and sharing?” different information would be required to answer this discovery driven question.

• What is a special moment?
• How do people like to capture special moments?
• How do they remember?
• How do they share?

Questions for business leaders:

• Are we using the same traditional information to solve discovery problems?
• Are we fuelling our thinking and decision making with different sources and data from our direct and indirect competitors?
• If not, where and how could we source this information?

4) Explore alternative ways forward

Expanding mental models, defining problem statements for discovery and accessing non-traditional information will undoubtedly generate new and fresh ideas. However, leaders must also identify selection criteria, a rational thought process used to evaluate business ideas, suitable for discovery.

Managers select options that have the greatest chance of achieving an organisation’s stated goal, hence selection criteria are closely linked to performance indicators. Today, organisations predominantly use Key Performance Indicators (KPIs) that are linked to sales, profit or efficiency to measure performance, hence directing the organisation, and its decisions, towards optimisation.

Discovery is about achieving objectives out of the ordinary, yet critical to business success in the 21st-century. Focusing mainly on how to increase sales, profit and on how to become more efficient will not allow an organisation to successfully identify how future value will be created, distributed and captured. For this to happen, new world KPIs and suitable selection criteria for discovery must be identified.

Imagine a traditional retailer recognising the need to turn their stores into an experience, rather than a place where customers come to transact. Yet, the KPI used to measure performance is sales per square meter. It is doubtful that an experience lead idea has the highest impact on direct sales, and would therefore not be selected. For ideas aimed at satisfying emerging needs to have the chance of surviving the selection process, relevant KPIs must be developed – in this instance, one that measures customer experience in stores.

Questions for business leaders:

• Does our KPIs allow for non-traditional ideas to be selected?
• What alternative KPIs could we adopt that would facilitate discovery driven idea selection?

In conclusion

In our uncertain world, exploiting the current business through optimisation remains important, but exploration through discovery is essential. In times of uncertainty, companies must ensure strategic decision making capable of discovery, as well as optimisation.

This requires organisations to adapt the decision making process to allow for exploration through discovery by continuously challenging how it see the world, and the information used to decipher it. Business leaders must also reconsider the way they define opportunities and identify challenges, as well as adapt measurement models and selection criteria to allow for discovery. These four steps will allow organisations to thrive beyond the now and into the future.

This article offers an insight into the CEDEP programme, Decision Making in Uncertainty, aimed at developing the necessary understanding, mindset, behaviour, skills and methodologies to enable leaders to make relevant strategic decisions for the future success of the organisation.

During the interactive programme, participants have the opportunity to hone their future facing decision making skills by:

• Obtaining a solid overview of key drivers behind the extraordinary shifts we are facing in the world today, their impact on business, as well as the out of ordinary opportunities and threats that are emerging
• Having traditional business understanding and norms tested, and alternative ones encouraged (business, industry, company, function, discipline, team, leadership philosophies)
• Letting go of assumptions and biases, expand the mindset and embrace new mental models to assist relevant information gathering, prioritisation and understanding
• Stretching the range and types of questions and solutions considered, as well as develop relevant decision-making criteria
• Raise awareness of methodologies, processes and tools that facilitate relevant decision making, in line with the new realities identified

Find out more about Liri Andersson here.

Find out more information about the Decision Making in Uncertainty leadership programme or contact Muriel Pailleux, Sales, Marketing and Communication Director at muriel.pailleux@cedep.fr