While it is common knowledge that results depend upon decisions, it may shock you to know from ‘Decide & Deliver’ (Harvard) that very few companies look systematically at what gets in the way of good decision-making and execution. Most organisations have never assessed their decision capabilities, fret the authors, Marcia W. Blenko, Michael C. Mankins, and Paul Rogers. Such organisations “lack a reliable way to tell how good or bad they are at decision making and execution relative to competitors and peers. Nor do they know whether they are improving their ability to decide and deliver over time.”
Impact on financial performance
Observing that many companies invest millions in fixing organisational issues, the authors reason that without knowing whether those investments improve decision abilities, it is difficult for companies to gauge whether they are likely to generate better financial performance.
Concentrating only on the big, strategic decisions made in the executive suites, and paying far less attention to improving the day-to-day operating decisions made by middle managers and frontline workers is a partial approach, the book instructs. For, some decisions in the latter category may be just as important to success, perhaps even more so.
“Sales reps’ decisions about discounts and terms, marketing managers’ decisions about promotions and ad placements, procurement specialists’ decisions about how much to pay for parts and components – for some companies, getting all these decisions right can add hundreds of millions of dollars to the bottom line.”
Shine a light on decisions
Rather than approach upfront the daunting task of exploring how you can build an organisation that enables individuals and teams, day in and day out, to use the skills and procedures that make for great decisions, the authors call for attention to decisions as a practical point of entry.
Once you shine a light directly on decisions, the organisational obstacles and bottlenecks suddenly show up in stark relief, they observe. “You can see adjustments that will help you make your most important decisions better and faster. You can see what else in the organisation needs to be changed to sustain good decision making and execution, and you can begin fixing that. Over time, you can embed the changes in the way the organisation works.”
Take for instance the case of Lafarge’s Aggregates & Concrete Division, cited in the book. Eliminating layers, simplifying reporting lines, and clarifying the roles managers played in key decisions, the division pushed many decisions out to people who could make better choices and execute them faster.
“Dispatch and pricing were now handled at local sites. Only a few of the critical decisions, such as geographic investment priorities and capital expenditures, remained the province of senior leaders. Thanks to such measures, the division trimmed overhead costs and improved effectiveness, raising its operating profit from 7.4 per cent to 9.5 per cent.”
Making good decisions
Dissecting ‘decision effectiveness,’ the authors find that it has four components, viz. quality, speed, yield, and effort. The formula they offer is simple: ‘Decision score = Quality x Speed x Yield – Effort.’ This shows how the first three have a multiplier effect while effort is the tax which has to be ideally at an appropriate level.
The first, that is, ‘quality,’ is about making good decisions more often than not. Contrary to what the ready-fire-aim school of management might claim, no company can generate consistently good performance without high-quality decisions, the authors remind. If the chief criterion for a good decision is whether in retrospect you believe you chose the right course of action, there are examples of both good and bad decisions.
For the latter, the book mentions the example of Time Warner and America Online merger for $112 billion in 2000. “The combination failed to pay off, and the man who presided over it, then-CEO Jerry Levin of Time Warner, later dubbed it ‘the worst deal of the century.’ So it’s safe to say that the acquisition was a poor decision.”
An example of a winning decision is of Southwest Airlines, which decided in the early 2000s to hedge its fuel costs aggressively, effectively locking in fixed prices for much of the jet fuel it used in its operations, the authors recount. They note that when petroleum prices skyrocketed in 2007, Southwest was protected against the worst of the cost increase and was one of the few airlines to remain profitable.
Conceding that not all decisions result in favourable outcomes, the authors advise companies to achieve a pretty high hit rate on quality by basing decisions on relevant facts, not on opinions or guesswork, by assessing risk as accurately as possible, and involving rigorous debate of alternatives.
Quick moves
Speed, the second component, is about how quickly an organisation moves. ‘Fast-fashion’ retailers such as Zara and Topshop make and execute decisions about in-season apparel trends much faster than mainstream retailers traditionally have done, bringing new products to the shelf in weeks rather than months, and thus achieving growth rates that are more than twice the industry average, as the book informs.
What counts most is not absolute speed, which will vary according to the business you are in and the kind of decision you are making, but speed relative to competitors, clarify Blenko et al. They add that in the case of industries such as high technology and media which are fast-changing, with nearly every participant moving quickly, what works for companies like eBay or Google can be getting the answer half right and changing things later than to push for additional analysis and miss out altogether.
There can be fast movers even in what are perceived to be slow-moving industries like pharmaceutical, where it takes many years to bring out a new drug. For example, drugs developed by the five fastest-moving companies, including Bayer, AstraZeneca, and Merck, earned an average of $1.1 billion each in incremental prescription revenue between 2000 and 2005, compared with drugs from the slowest-moving companies, according to a study referred to in the book.
Yield, effort
How well a company turns its decisions into action is ‘yield,’ the third component. “When BP bought Amoco in 1998, for instance, the acquirer executed the merger so well that it achieved its projected $2 billion in cost savings in just one year.” In situations such as these, what counts is not just the implementation of big, strategic decisions, but also the execution of day-to-day decisions by middle managers and frontline employees.
And the final component, ‘effort,’ refers to the time, trouble, expense, and sheer emotional energy required to make and execute a decision, the authors describe. Outlining the many related questions – “How many committees must a decision go through? How many people must sign off on it? How many analyses and reviews must be conducted before they do? How difficult is the translation of a decision into action?” – they state that effort becomes an issue only when it is substantially higher or lower than it ought to be.
To those who wonder how the multiplier effect is achieved in the case of quality, speed, and yield, the book elaborates that executives who focus on only one are missing two-thirds of the picture. “Speed and yield each matter a good deal more than most people think; in fact, they’re on par with quality in relation to a company’s financial performance.”
Insights of immense value to managers and finance professionals.
