The Decision Process—Five Key Steps
Business decisions are difficult when they involve uncertainty, present many alternatives, are complex, and raise interpersonal issues.
Uncertainty makes us hesitate: “How can I decide when I don’t have all the facts, and when I cannot be certain about the outcome of my decision?” Some managers prefer doing nothing to taking what appears to be a leap in the dark.
Alternative courses of action can be equally troubling when each alternative has its own uncertainties and unknowable outcomes. Complexity, too, makes decision making difficult.
Decisions also involve interpersonal issues that are difficult to measure and assess but often determine the success or failure of the actions taken.
The decision process
1. Establish a context for success.
2. Frame the issue properly.
3. Generate alternatives.
4. Evaluate the alternatives.
5. Choose the alternative that appears best.
Process is critical for effective results. Being smart or hardworking does not ensure the quality or quantity of output. It will be haphazard in the absence of an effective process, which is needed whether you’re producing ball bearings or automobiles or making decisions. When the process is right, quality will improve. If you adopt an effective process and train people in its use, output will improve and will be consistently good. If you continually improve the process, the output will continue to improve.
Step 1: Establish a Context for Success
The first step is to create an environment in which effective decisions are possible. If this task doesn’t seem necessary, take a look around you. If your company is like many others, you’ll find that choices are often influenced by factors that are antithetical to sound decision making. For example, bickering between individuals eliminates rational discussion; management cannot maintain a healthy level of differences of opinion. A command-and-control culture tends to make decisions in line with the preferences of powerful individuals. No matter how well informed they may be, in these circumstances every decision is ad hoc, and there is no consistent approach to dealing with important choices.
A decision-friendly context is generally free of these problems. In addition, it ensures that the right people participate in the process. Those people meet in a physical setting that encourages creative thinking and careful deliberation. A decision-friendly context also has ground rules that determine how a decision will be made.
Step 2: Frame the Issue Properly
Every successful decision depends on a clear understanding of the issues at hand and the ways each will affect the objectives of the business. It is critical to determine the nature of the problem. As you’ll see later, you cannot make a good decision if you fail to properly frame the problem.
Step 3: Generate Alternatives
After the issue has been properly framed, decision makers must develop alternative choices. In the absence of alternatives there can be no genuine decision.
Step 4: Evaluate the Alternatives
Once you have a realistic set of alternatives, you must assess the feasibility, as well as the risk and implications, of each possible choice.
Step 5: Choose the Best Alternative
When all previous steps have been carried out properly and the decision team is in agreement on its objective, the team members can rationally evaluate each of the alternatives. Under ideal circumstances, the right choice will be clear. But in reality, some degree of personal preferences, ambiguity, and dissention often makes the final choice difficult. Fortunately, there are techniques that can help a decision team get through these difficulties. These methods, explained in chapter 6, have fanciful names: catchball, point-counterpoint, and intellectual watchdog. Using these techniques ensures that the merits and demerits of each alternative are fully understood and debated.
In short, sound decision making is as much an art as a science. It demands good judgment and creativity in addition to technical proficiency.
The Uncertainty Problem—How to Deal with Unknowns
Most of us rely on what we know about the past to provide insights into the future. What we know of the past and the present can help us understand where we are, where we have been, and what the general trajectory of our journey looks like. But the past and present provide nothing more than hints about the future. As Coleridge put it, “History is a lantern at the stern of a ship, revealing only where it has been,” casting only a dim light on the course ahead.
This chapter addresses the knotty problem of uncertainty and offers a three-step approach for dealing with it:
Step 1: Identify the areas of uncertainty.
Step 2: Determine which uncertainties could have the greatest impact on the outcome of your decision.
Step 3: Reduce key uncertainties to the extent that you have the time and resources to do so.
These steps cannot solve the problem of uncertainty, but they can help reduce its extent and improve the odds of making a good decision.
Step 1: Identify Areas of Uncertainty
Where are the areas of uncertainty in the decisions you are trying to make?
Ideally, the time to identify uncertainties is in the evaluation phase of the decision-making process. Dealing with the unknowns too early will discourage people from developing a list of creative alternatives. A typical response might be, “Forget that one—there would be too many unknowns to get a go-ahead from senior management. ”
The evaluation phase requires a systematic identification and listing of the uncertainties associated with each alternative.
Ask for Ranges
What the decision maker needs is a range of possible outcomes for each uncertainty, as determined by experienced and knowledgeable informants.
Assign Probabilities
Step 2: Determine Which Uncertainties Could Have the Greatest Impact
One uncertainty might merely reduce your profit margin if the future doesn’t unfold as anticipated. Another uncertainty, however, might hand you a multimillion-dollar loss. The job of the decision maker is to sort out the likelihood of each decision as well as its potential impact.
Step 3: Attempt to Reduce Key Uncertainties
Here are some of the techniques that companies use to reduce uncertainties:
? Customer research
? Test marketing of new products in selected cities
? Focus group interviews
? Direct observation of how customers use products
? Computer simulations
McDonald’s, for example, owns and operates a number of restaurants (most are owned by franchisees) that it uses to test customer acceptance of new menu items before it makes the decision to introduce them broadly. This testing takes time and resources, but it reduces the risk in the company’s decisions. Other companies use sophisticated methods such as conjoint analysis (mapping how consumers see the relative value of product features) to test customer willingness to trade off one value for another. These and other methods shed light on murky areas where decision makers must operate.
Many decision uncertainties involve future customer preferences (what will they want?) and levels of future customer demand (how many will they want?). The first is critical for decisions about developing products and services; the second affects recurring decisions about production and inventory. Although most people try to clarify these uncertainties through market research, some companies have found tactical methods for reducing them. Here we look at four of these methods: narrowing time gaps, building to order, risk-limiting tactics, and staged decisions.
a) Narrow Time Gaps
In the early 1990s, researchers at Harvard Business School discovered an important difference between Japanese and American automakers: the Japanese were designing and launching new car models in roughly two years, whereas their U. S. competitors took almost four years to do the same thing. Being faster to market gave the Japanese certain advantages. The most obvious was that they began receiving revenues from their new model investments much sooner. The Americans faced four years of expenses before they earned a dollar from their work. But there was another, less obvious benefit from cutting time to market: less uncertainty.
How long does it take your company to design and launch a new product? A year? Three years? Five? Whatever it is, you can reduce some of the uncertainty by reducing the time gap between your decision and its implementation. Just as our vision becomes less clear as we turn our eyes from our immediate vicinity to the distant horizon, planning horizons become increasingly uncertain as they extend into the future.
Zara’s ability to bring new designs to stores in less than two weeks allows it to carry less inventory and minimize accumulations of stock due to suppy- demand mismatch
b) Build to Order
Another way to reduce uncertainty is to adopt a build-to- order strategy. Following this strategy, decision makers don’t have to gamble with how many products to build or how to configure them. Those decisions are made by customers in advance of production.
Dell managers are not burdened by decisions about how many machines to build and which features to include. Customers make those decisions for them every day. Dell’s supply chain swings into action only when an order is taken and the exact specifications are known. That supply chain is so efficient that Dell can deliver a custom-built machine to a customer’s doorstep in ten days or less. Rivals who build to stock, in contrast, often make too many of what customers don’t really want and end up with lots of unwanted inventory. And in the PC industry, the value of inventory deteriorates at an amazing rate of 2 percent per day. These manufacturers also risk making too few of the machines that customers want in a given month, and that results in missed sales.
If your company cannot build to order, there is a compromise solution: build items to stock with all but the finishing details added as orders come in. Benetton popularized this strategy in the clothing industry. Benetton makes sweaters, for example, from undyed material. Once the season’s popular colors are known, it quickly dyes its semi- finished stock and ships it out, thereby cutting the time between the receipt of market information and the shipment of its products and reducing the risk of producing items in unpopular colors.
c) Adopt Risk-Limiting Production Tactics
Even when decision makers lack sound data, it’s often possible to limit risk. A developer and manufacturer of music compact discs, for example, will have only a vague idea of how many copies will be ordered during the first year. Every CD experiences a different level of customer demand. Prerelease orders from music stores is one indicator of demand, but it’s unreliable at best. Nevertheless, someone must decide on an initial production run.
One practical way to limit risk is to manufacture enough copies to satisfy prerelease sales plus six or eight thousand extras, and then be prepared to restock quickly if sales take off. This strategy will reduce two risks: the risk of producing too many CDs (and ending up with worthless inventory) and the risk of producing too few (and missing sales because of an out-of-stock condition).
Consider one of the most problem-plagued areas of decision making: hiring. Because the true value of a new employee can be known only after that person is on the payroll and in the job, many employers have an official probationary period of two to four months during which the new person’s performance is regularly monitored. He can be terminated during that period without the reviews, remediation efforts, and separation costs normally accorded to long-term employees.
Other firms have taken an additional risk-reducing step: they hire people as independent contractors to handle temporary jobs. If the temp worker demonstrates good performance, the company hires her to a full-time position
d) Make Staged Decisions
Venture capitalists (VCs) take substantial risks when they fund young, entrepreneurial businesses. Few business investments, in fact, are made with so little in the way of rock-solid information. In many cases the only facts VCs have to work with are a business plan and the reputation of the start-up company’s founder and management team.
Each decision in the sequence is treated as an experiment, a practice that produces learning that feeds into the next decision (see figure 7-2). For example, if the new business needs $1 million in venture capital, a VC may provide an initial investment of $200,000 and then set up a set of milestones that must be reached within a certain period. When that time comes, the business’s progress and current circumstances are reevaluated, and another go–no go decision will be made, involving another milestone and another infusion of capital.
This staged decision approach should be familiar to anyone in new product development, where the stage-gate system of review and funding is widely used. The stage-gate system was developed by Robert Cooper in the late 1980s. [2] It is an alternating series of development stages and assessment gates that aims for early elimination of weak ideas and faster time to market for potential winners. These stages and gates control events from the initial idea all the way to commercialization.
A stage-gate system
? Stages. Stages are phases of the process in which development work is done. For example, a system would have stages for developing the raw idea, technical specifications, a prototype, and so forth. Commercialization is the final stage.
? Gates. Gates are decision checkpoints where people with expertise and the authority to allocate resources determine whether the project should be killed, sent back for more development, or advanced to the next development stage. Gates can be used at various points to determine strategic fit, whether the project passes technical and financial hurdles, whether it’s ready for testing or launch, and so forth.
e) Be Prepared for the Worst
Preparing for a bad outcome begins with making a list of the specific things that could go wrong in a decision. Each item on the list should then provoke this question: “How will we respond if this happens?” The response should take the form of a contingency plan that aims to limit the damage and, hopefully, help the company recover from the bad outcome.
When to Trust Your Gut
Research indicates that 45 percent of executives rely on their intuition rather than on facts in running their businesses. And some have been extremely successful. Consider these examples:
? One of the founders of Sun Microsystems saw an early demonstration of a search engine developed by two graduate students. He invested $100,000 on the spot in what would become Google.
? Michael Eisner heard a pitch for a new TV show with the unlikely name Who Wants to Be a Millionaire? Something told him that it would be a winner, and he made a commitment to fund it.
? At the end of World War II in 1945, many share prices on the New York Stock Exchange were still far behind their 1929 peaks. Nor did the future look particularly bright. Yet John Templeton borrowed some money and bought a handful of shares of every stock listed on the exchange. That investment made a huge profit in the years that followed.
? Decades later, financier George Soros made a fortune by following his hunch that the currency markets were approaching a major shift.
Intuition, the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis, appears to become more important as a person deals with complex decisions in which uncertainties and ambiguities are greatest.
As Alden M. Hayashi told readers of Harvard Business Review in 2001, “The consensus is that the higher up on the corporate ladder people climb, the more they’ll need well-honed business instincts. In other words, intuition is one of the X factors that separate the men from the boys.
What we call intuition is based on memories, pattern recognition, accumulated experience, conditioning, and long-held personal biases.
As one author, Eric Bonabeau, put it, “Anyone who thinks that intuition is a substitute for reason is indulging in a risky delusion. Detached from rigorous analysis, intuition is a fickle and undependable guide—it is as likely to lead to disaster as to success.
Bonabeau, Hayashi, and others who have studied this issue agree that intuition can be useful, but only insofar as it works in tandem with rational analysis. In other words, the right side of the brain, which houses our intuitive power, must collaborate with the left side, the source of logic and analytical power.
Kim Wallace, chairman of Wallace and Washburn, a Boston-based marketing research and consultancy firm, discovered this for himself many years ago. “The key to making a decision,” Wallace told us in early 2005, “is to delay the decision until it makes logical sense and it feels right. The two sides of the brains must agree. If they don’t, delay the decision. Get more input from more sources until it eventually lines up on both logical and intuitive perspectives. This sounds very simple, and it is. But I have never made a bad decision using this process.
Summing Up
? When a decision involves a high level of uncertainty, try this three-step approach: (1) identify the areas of uncertainty, (2) determine which uncertainties could have the greatest impact on the outcome of your decision, and (3) reduce key uncertainties to the extent that you have the time and resources to do so.
? As you gather estimates of uncertain future outcomes, avoid point estimates. These are bound to be wrong. Instead, try to estimate a range of likely outcomes.
? In estimating the probability of a particular outcome, don’t rely solely on your own judgment. Instead, enlist the views of the most experienced and knowledgeable people.
? Narrowing time gaps, building to order, adopting risk-limiting tactics, and making staged decisions are four ways to manage the risks in decisions.
? Intuition is the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis.
? Intuition can be useful when it works in tandem with rational analysis.
For more Information:
Decision Making, How to deal with Uncertainty, Problem Solving
Business decisions are difficult when they involve uncertainty, present many alternatives, are complex, and raise interpersonal issues.
Uncertainty makes us hesitate: “How can I decide when I don’t have all the facts, and when I cannot be certain about the outcome of my decision?” Some managers prefer doing nothing to taking what appears to be a leap in the dark.
Alternative courses of action can be equally troubling when each alternative has its own uncertainties and unknowable outcomes. Complexity, too, makes decision making difficult.
Decisions also involve interpersonal issues that are difficult to measure and assess but often determine the success or failure of the actions taken.
The decision process
1. Establish a context for success.
2. Frame the issue properly.
3. Generate alternatives.
4. Evaluate the alternatives.
5. Choose the alternative that appears best.
Process is critical for effective results. Being smart or hardworking does not ensure the quality or quantity of output. It will be haphazard in the absence of an effective process, which is needed whether you’re producing ball bearings or automobiles or making decisions. When the process is right, quality will improve. If you adopt an effective process and train people in its use, output will improve and will be consistently good. If you continually improve the process, the output will continue to improve.
Step 1: Establish a Context for Success
The first step is to create an environment in which effective decisions are possible. If this task doesn’t seem necessary, take a look around you. If your company is like many others, you’ll find that choices are often influenced by factors that are antithetical to sound decision making. For example, bickering between individuals eliminates rational discussion; management cannot maintain a healthy level of differences of opinion. A command-and-control culture tends to make decisions in line with the preferences of powerful individuals. No matter how well informed they may be, in these circumstances every decision is ad hoc, and there is no consistent approach to dealing with important choices.
A decision-friendly context is generally free of these problems. In addition, it ensures that the right people participate in the process. Those people meet in a physical setting that encourages creative thinking and careful deliberation. A decision-friendly context also has ground rules that determine how a decision will be made.
Step 2: Frame the Issue Properly
Every successful decision depends on a clear understanding of the issues at hand and the ways each will affect the objectives of the business. It is critical to determine the nature of the problem. As you’ll see later, you cannot make a good decision if you fail to properly frame the problem.
Step 3: Generate Alternatives
After the issue has been properly framed, decision makers must develop alternative choices. In the absence of alternatives there can be no genuine decision.
Step 4: Evaluate the Alternatives
Once you have a realistic set of alternatives, you must assess the feasibility, as well as the risk and implications, of each possible choice.
Step 5: Choose the Best Alternative
When all previous steps have been carried out properly and the decision team is in agreement on its objective, the team members can rationally evaluate each of the alternatives. Under ideal circumstances, the right choice will be clear. But in reality, some degree of personal preferences, ambiguity, and dissention often makes the final choice difficult. Fortunately, there are techniques that can help a decision team get through these difficulties. These methods, explained in chapter 6, have fanciful names: catchball, point-counterpoint, and intellectual watchdog. Using these techniques ensures that the merits and demerits of each alternative are fully understood and debated.
In short, sound decision making is as much an art as a science. It demands good judgment and creativity in addition to technical proficiency.
The Uncertainty Problem—How to Deal with Unknowns
Most of us rely on what we know about the past to provide insights into the future. What we know of the past and the present can help us understand where we are, where we have been, and what the general trajectory of our journey looks like. But the past and present provide nothing more than hints about the future. As Coleridge put it, “History is a lantern at the stern of a ship, revealing only where it has been,” casting only a dim light on the course ahead.
This chapter addresses the knotty problem of uncertainty and offers a three-step approach for dealing with it:
Step 1: Identify the areas of uncertainty.
Step 2: Determine which uncertainties could have the greatest impact on the outcome of your decision.
Step 3: Reduce key uncertainties to the extent that you have the time and resources to do so.
These steps cannot solve the problem of uncertainty, but they can help reduce its extent and improve the odds of making a good decision.
Step 1: Identify Areas of Uncertainty
Where are the areas of uncertainty in the decisions you are trying to make?
Ideally, the time to identify uncertainties is in the evaluation phase of the decision-making process. Dealing with the unknowns too early will discourage people from developing a list of creative alternatives. A typical response might be, “Forget that one—there would be too many unknowns to get a go-ahead from senior management. ”
The evaluation phase requires a systematic identification and listing of the uncertainties associated with each alternative.
Ask for Ranges
What the decision maker needs is a range of possible outcomes for each uncertainty, as determined by experienced and knowledgeable informants.
Assign Probabilities
Step 2: Determine Which Uncertainties Could Have the Greatest Impact
One uncertainty might merely reduce your profit margin if the future doesn’t unfold as anticipated. Another uncertainty, however, might hand you a multimillion-dollar loss. The job of the decision maker is to sort out the likelihood of each decision as well as its potential impact.
Step 3: Attempt to Reduce Key Uncertainties
Here are some of the techniques that companies use to reduce uncertainties:
? Customer research
? Test marketing of new products in selected cities
? Focus group interviews
? Direct observation of how customers use products
? Computer simulations
McDonald’s, for example, owns and operates a number of restaurants (most are owned by franchisees) that it uses to test customer acceptance of new menu items before it makes the decision to introduce them broadly. This testing takes time and resources, but it reduces the risk in the company’s decisions. Other companies use sophisticated methods such as conjoint analysis (mapping how consumers see the relative value of product features) to test customer willingness to trade off one value for another. These and other methods shed light on murky areas where decision makers must operate.
Many decision uncertainties involve future customer preferences (what will they want?) and levels of future customer demand (how many will they want?). The first is critical for decisions about developing products and services; the second affects recurring decisions about production and inventory. Although most people try to clarify these uncertainties through market research, some companies have found tactical methods for reducing them. Here we look at four of these methods: narrowing time gaps, building to order, risk-limiting tactics, and staged decisions.
a) Narrow Time Gaps
In the early 1990s, researchers at Harvard Business School discovered an important difference between Japanese and American automakers: the Japanese were designing and launching new car models in roughly two years, whereas their U. S. competitors took almost four years to do the same thing. Being faster to market gave the Japanese certain advantages. The most obvious was that they began receiving revenues from their new model investments much sooner. The Americans faced four years of expenses before they earned a dollar from their work. But there was another, less obvious benefit from cutting time to market: less uncertainty.
How long does it take your company to design and launch a new product? A year? Three years? Five? Whatever it is, you can reduce some of the uncertainty by reducing the time gap between your decision and its implementation. Just as our vision becomes less clear as we turn our eyes from our immediate vicinity to the distant horizon, planning horizons become increasingly uncertain as they extend into the future.
Zara’s ability to bring new designs to stores in less than two weeks allows it to carry less inventory and minimize accumulations of stock due to suppy- demand mismatch
b) Build to Order
Another way to reduce uncertainty is to adopt a build-to- order strategy. Following this strategy, decision makers don’t have to gamble with how many products to build or how to configure them. Those decisions are made by customers in advance of production.
Dell managers are not burdened by decisions about how many machines to build and which features to include. Customers make those decisions for them every day. Dell’s supply chain swings into action only when an order is taken and the exact specifications are known. That supply chain is so efficient that Dell can deliver a custom-built machine to a customer’s doorstep in ten days or less. Rivals who build to stock, in contrast, often make too many of what customers don’t really want and end up with lots of unwanted inventory. And in the PC industry, the value of inventory deteriorates at an amazing rate of 2 percent per day. These manufacturers also risk making too few of the machines that customers want in a given month, and that results in missed sales.
If your company cannot build to order, there is a compromise solution: build items to stock with all but the finishing details added as orders come in. Benetton popularized this strategy in the clothing industry. Benetton makes sweaters, for example, from undyed material. Once the season’s popular colors are known, it quickly dyes its semi- finished stock and ships it out, thereby cutting the time between the receipt of market information and the shipment of its products and reducing the risk of producing items in unpopular colors.
c) Adopt Risk-Limiting Production Tactics
Even when decision makers lack sound data, it’s often possible to limit risk. A developer and manufacturer of music compact discs, for example, will have only a vague idea of how many copies will be ordered during the first year. Every CD experiences a different level of customer demand. Prerelease orders from music stores is one indicator of demand, but it’s unreliable at best. Nevertheless, someone must decide on an initial production run.
One practical way to limit risk is to manufacture enough copies to satisfy prerelease sales plus six or eight thousand extras, and then be prepared to restock quickly if sales take off. This strategy will reduce two risks: the risk of producing too many CDs (and ending up with worthless inventory) and the risk of producing too few (and missing sales because of an out-of-stock condition).
Consider one of the most problem-plagued areas of decision making: hiring. Because the true value of a new employee can be known only after that person is on the payroll and in the job, many employers have an official probationary period of two to four months during which the new person’s performance is regularly monitored. He can be terminated during that period without the reviews, remediation efforts, and separation costs normally accorded to long-term employees.
Other firms have taken an additional risk-reducing step: they hire people as independent contractors to handle temporary jobs. If the temp worker demonstrates good performance, the company hires her to a full-time position
d) Make Staged Decisions
Venture capitalists (VCs) take substantial risks when they fund young, entrepreneurial businesses. Few business investments, in fact, are made with so little in the way of rock-solid information. In many cases the only facts VCs have to work with are a business plan and the reputation of the start-up company’s founder and management team.
Each decision in the sequence is treated as an experiment, a practice that produces learning that feeds into the next decision (see figure 7-2). For example, if the new business needs $1 million in venture capital, a VC may provide an initial investment of $200,000 and then set up a set of milestones that must be reached within a certain period. When that time comes, the business’s progress and current circumstances are reevaluated, and another go–no go decision will be made, involving another milestone and another infusion of capital.
This staged decision approach should be familiar to anyone in new product development, where the stage-gate system of review and funding is widely used. The stage-gate system was developed by Robert Cooper in the late 1980s. [2] It is an alternating series of development stages and assessment gates that aims for early elimination of weak ideas and faster time to market for potential winners. These stages and gates control events from the initial idea all the way to commercialization.
A stage-gate system
? Stages. Stages are phases of the process in which development work is done. For example, a system would have stages for developing the raw idea, technical specifications, a prototype, and so forth. Commercialization is the final stage.
? Gates. Gates are decision checkpoints where people with expertise and the authority to allocate resources determine whether the project should be killed, sent back for more development, or advanced to the next development stage. Gates can be used at various points to determine strategic fit, whether the project passes technical and financial hurdles, whether it’s ready for testing or launch, and so forth.
e) Be Prepared for the Worst
Preparing for a bad outcome begins with making a list of the specific things that could go wrong in a decision. Each item on the list should then provoke this question: “How will we respond if this happens?” The response should take the form of a contingency plan that aims to limit the damage and, hopefully, help the company recover from the bad outcome.
When to Trust Your Gut
Research indicates that 45 percent of executives rely on their intuition rather than on facts in running their businesses. And some have been extremely successful. Consider these examples:
? One of the founders of Sun Microsystems saw an early demonstration of a search engine developed by two graduate students. He invested $100,000 on the spot in what would become Google.
? Michael Eisner heard a pitch for a new TV show with the unlikely name Who Wants to Be a Millionaire? Something told him that it would be a winner, and he made a commitment to fund it.
? At the end of World War II in 1945, many share prices on the New York Stock Exchange were still far behind their 1929 peaks. Nor did the future look particularly bright. Yet John Templeton borrowed some money and bought a handful of shares of every stock listed on the exchange. That investment made a huge profit in the years that followed.
? Decades later, financier George Soros made a fortune by following his hunch that the currency markets were approaching a major shift.
Intuition, the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis, appears to become more important as a person deals with complex decisions in which uncertainties and ambiguities are greatest.
As Alden M. Hayashi told readers of Harvard Business Review in 2001, “The consensus is that the higher up on the corporate ladder people climb, the more they’ll need well-honed business instincts. In other words, intuition is one of the X factors that separate the men from the boys.
What we call intuition is based on memories, pattern recognition, accumulated experience, conditioning, and long-held personal biases.
As one author, Eric Bonabeau, put it, “Anyone who thinks that intuition is a substitute for reason is indulging in a risky delusion. Detached from rigorous analysis, intuition is a fickle and undependable guide—it is as likely to lead to disaster as to success.
Bonabeau, Hayashi, and others who have studied this issue agree that intuition can be useful, but only insofar as it works in tandem with rational analysis. In other words, the right side of the brain, which houses our intuitive power, must collaborate with the left side, the source of logic and analytical power.
Kim Wallace, chairman of Wallace and Washburn, a Boston-based marketing research and consultancy firm, discovered this for himself many years ago. “The key to making a decision,” Wallace told us in early 2005, “is to delay the decision until it makes logical sense and it feels right. The two sides of the brains must agree. If they don’t, delay the decision. Get more input from more sources until it eventually lines up on both logical and intuitive perspectives. This sounds very simple, and it is. But I have never made a bad decision using this process.
Summing Up
? When a decision involves a high level of uncertainty, try this three-step approach: (1) identify the areas of uncertainty, (2) determine which uncertainties could have the greatest impact on the outcome of your decision, and (3) reduce key uncertainties to the extent that you have the time and resources to do so.
? As you gather estimates of uncertain future outcomes, avoid point estimates. These are bound to be wrong. Instead, try to estimate a range of likely outcomes.
? In estimating the probability of a particular outcome, don’t rely solely on your own judgment. Instead, enlist the views of the most experienced and knowledgeable people.
? Narrowing time gaps, building to order, adopting risk-limiting tactics, and making staged decisions are four ways to manage the risks in decisions.
? Intuition is the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis.
? Intuition can be useful when it works in tandem with rational analysis.
For more Information:
Decision Making, How to deal with Uncertainty, Problem Solving
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