This article is my summarized point-of-view on Strategic Decision Making. Since I live in Cape Town, South Africa, it also brings a touch of local perspective.
Executive summary
Strategic mistakes and missed opportunities abound. The widespread result is of value being destroyed or left on the table.
In today’s world it’s no easier and we need to make important decisions more often.
Misplaced beliefs and skill gaps are making value creation a gamble, which it should not be.
Analysing what goes wrong leads us to a set of requirements that will drive quality improvements in our strategic decision making.
There are proven tools and techniques for meeting these requirements and thereby making good strategic decisions.
1. Strategic mistakes and missed opportunities abound. The widespread result is of value being destroyed or left on the table.
Missed opportunities abound, even for industry leaders, e.g. Kodak, Blackberry, Nokia. And in South Africa: Stuttafords going under, big banks missing the low-income segment that Capitec captured.
Approximately 50% of M&A deals result in “partial” or “substantial” value erosion. And we see South African companies experiencing all nature of challenges as they attempt organic and inorganic expansion in Africa. Examples include Shoprite reversing out of Egypt, Telkom and Tiger Brands suffering huge losses in Nigeria, and Altech, Nando's, and Naspers all struggling in East Africa.
Capital projects routinely exceed budget and schedule and under-deliver on their planned benefits. Local examples include Cape Town’s stadium (2.5x original budget) and Eskom’s Medupi (3x original budget and extensive delays).
2. In today’s world it’s no easier and we need to make important decisions more often.
Today’s world is one of increasing pace, complexity and uncertainty. In the last twelve months we have seen: Brexit and Trump. SA’s finance minister Pravin Gordhan was exited and a credit downgrade followed. London suffered four terror attacks. Bitcoin’s value increased by 500%. And in the last few weeks Amazon.com bought Whole Foods (approval pending), Jacob Zuma survived another vote of no-confidence, and North Korea successfully tested an intercontinental missile.
Like all markets, but arguably even more so on the African continent, companies doing business in South Africa and Africa, face geopolitical uncertainty, erratic foreign exchange rates, volatile commodity prices, and questionable dependability of institutions.
It seems that many leading companies are not making the strategic decisions whereby they evolve and remain relevant. From the NYSE to the LSE to the JSE, we see a decreasing average period that companies remain on these stock exchanges. And looking forward, there is an increasingly gloomy outlook for 33%, 50%, and 66% of large companies over the next 5, 10 and 15 years, respectively [Why care NOW about strategic decision making].
3. Misplaced beliefs and skill gaps are making value creation a gamble, which it should not be.
We hold one or more of the following false beliefs about strategic decision making:
Decision quality should be judged on the outcome achieved, not the process followed.
Our intuition is generally valuable and reliable.
Expert forecasts are mostly reliable.
We don’t have the skills, nor do we see the need to:
Model uncertainty when evaluating strategies.
Recognize and counteract cognitive and motivational biases.
Companies that have deliberately addressed these beliefs and skills have delivered tremendous value.
While it is difficult to prove direct causality, Chevron and Eli Lilly are two organizations that have implemented a strategic decision-making capability and it is reasonable to assume that some portion of their improved performance can be attributed to this capability.
Following their implementation of strategic decision making, had Chevron and Eli Lilly grown their market cap at the same rate as their industry peers they would not have created an incremental $96 billion (Chevron) and $37 billion (Eli Lilly).
4. Analysing what goes wrong leads us to a set of requirements that will drive quality improvements in our strategic decision making.
By recognizing the importance of process, we will invest in defining and following a good process.
By being value-centric we will avoid solving the wrong problem and have clarity on what we are deciding.
By focusing on ideation, we will not settle for what easily comes to mind, rather we will create compelling, diverse and executable alternatives.
By embracing uncertainty and counteracting biases, we will evaluate strategic alternatives logically and with appropriate rigor.
By applying “living strategy” concepts, we will plan realistically and execute with agility.
By segmenting decisions, we will apply our efforts in proportion to the scale and complexity of our decision problems.
By engaging effectively with key decision makers, we will stop efforts early that don’t have support, and continue and refine those that are supported.
By being deliberate about learning from past decisions, we will improve our capabilities for future decisions.
5. There are proven tools and techniques for meeting these requirements and thereby making good strategic decisions.
The process described below is leveraged from the Stanford Strategic Decision and Risk Management program [2].
It was from this process and associated tools that Chevron and Eli Lilly’s strategic decision-making capability was built.
The essence of the process is four key steps (frame, generate alternatives, evaluate, plan), with each step involving a dialogue with key stakeholders.
The steps are tailored to each decision problem and invariably there are iterations as insights derived during evaluation inform better alternatives.
A variety of tools (e.g. strategy table, tornado diagram, probability encoding, flying bars) are used at each stage of the process.
The process described above is monitored and evaluated using the “DQ framework” [3], which determines the extent to which the dimensions of decision quality are being met.
Because “it is easier to recognize other people’s mistakes than our own”[4], these tools and techniques are most effective when applied by an independent decision professional working with the executive(s) charged with making the decision.
Closing with the words of Carl Spetzler, chairman of the Strategic Decisions Group: “As decision makers we leave tremendous value on the table because we believe we are making good decisions already”[5].
References:
[1] https://www.linkedin.com/pulse/why-care-now-strategic-decision-making-wayne-borchardt?trk=mp-reader-card
[2] http://strategicdecisions.stanford.edu/
[3] https://www.sdg.com/thought-leadership/decision-quality-defined/
[4] “Thinking, Fast and Slow”, Daniel Kahneman
[5] https://www.sdg.com/wp-content/uploads/2015/06/SDG_-_Chevron_Overcomes_Biggest_Bias_of_All.pdf