Monday, October 21, 2013
Deciding How to Decide
The Magazine - November 2013
by Hugh Courtney, Dan Lovallo, and Carmina Clarke
Senior managers are paid to make tough decisions. Much rides on the outcome of those decisions, and executives are judged—quite rightly—on their overall success rate. It’s impossible to eliminate risk from strategic decision making, of course. But we believe that it is possible for executives—and companies—to significantly improve their chances of success by making one straightforward (albeit not simple) change: expanding their tool kit of decision support tools and understanding which tools work best for which decisions.
Most companies overrely on basic tools like discounted cash flow analysis or very simple quantitative scenario testing, even when they’re facing highly complex, uncertain contexts. We see this constantly in our consulting and executive education work, and research bears out our impressions. Don’t misunderstand. The conventional tools we all learned in business school are terrific when you’re working in a stable environment, with a business model you understand and access to sound information. They’re far less useful if you’re on unfamiliar terrain—if you’re in a fast-changing industry, launching a new kind of product, or shifting to a new business model. That’s because conventional tools assume that decision makers have access to remarkably complete and reliable information. Yet every business leader we have worked with over the past 20 years acknowledges that more and more decisions involve judgments that must be made with incomplete and uncertain information.