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- A Guide to Making Great Strategic Decisions
- A Guide to Making Great Strategic Decisions

Group Members:

Falak Zubair Khan - 11819 Saman Zulfiqar - 11430 Shafaq Salim - 11757 Tooba Iqbal - 11501

We would like to thank our course instructor Ms. Shagufta Rafif for us assigning such an

We would like to thank our course instructor Ms.

Shagufta Rafif for us assigning such an

interesting project, which enhanced our research skills.

We would like to thank our course instructor Ms. Shagufta Rafif for us assigning such an
This article has been written by Daniel Kahneman, Dan Lovallo, and Olivier Sibony and was published

This article has been

written by Daniel

Kahneman, Dan Lovallo, and Olivier Sibony and was published in the Harvard Business Review of June 2011.

This article has been written by Daniel Kahneman, Dan Lovallo, and Olivier Sibony and was published

Harvard Business Review - June 2011 Edition.

"Stay committed to your decisions, but stay flexible in your approach." - Tony Robbins

"Stay committed to your decisions, but stay

flexible in your approach."

"Stay committed to your decisions, but stay flexible in your approach." - Tony Robbins

- Tony Robbins

This case discusses the errors managers make while making a decision. Most common errors are: 

This case discusses the errors managers make while making a

decision. Most common errors are:

This case discusses the errors managers make while making a decision. Most common errors are: 
  • Confirmation Bias: The tendency to seek out information that reaffirm past

choices and to discount information

that contradicts past judgment.

  • Anchoring Bias: A tendency to

fixate on initial information, and fails

to adequately adjust for subsequent information.

 Loss Aversion: Refers to people's tendency to strongly prefer avoiding losses to acquiring gains. It
  • Loss Aversion: Refers to

people's tendency to strongly prefer avoiding losses to acquiring gains. It implies that one who loses $100 will lose more satisfaction than another

person will gain satisfaction

from a $100 windfall.

 Loss Aversion: Refers to people's tendency to strongly prefer avoiding losses to acquiring gains. It

According to Cognitive scientists,

there are two modes of thinking, intuitive and reflective.

  • System One produces a constant representation of the world around us

and allows us to do things that we

are not consciously focusing on, we just do them.

  • In System Two, thinking is slow, effortful and deliberate. It is typically

monitoring things and is mobilized when we detect an obvious error or when rule-based reasoning is required.

According to Cognitive scientists, there are two modes of thinking, intuitive and reflective.  System One
The author discussed the experiences of three corporate executives - Bob, Lisa and Devesh, who were

The author discussed the experiences of three

corporate executives - Bob, Lisa and Devesh, who

were asked to consider very different kind of proposals.

The author discussed the experiences of three corporate executives - Bob, Lisa and Devesh, who were


Bob is the vice president of sales in a

business services company. Recently, his senior regional VP and several colleagues recommended a total overhaul of the company's pricing structure.

They argued that the company had

lost a number of bids to competitors,

as well as some of its best salespeople,

because of unsustainable price levels but making the wrong move could be very costly.

 Bob is the vice president of sales in a business services company. Recently, his senior
  • Lisa is the Chief Financial Officer

of a capital-intensive manufacturing company.

  • The VP of manufacturing has

proposed a substantial investment

in one of the manufacturing site.

  • The request is accompanied with

proper research. But the

investment would be a very large one- in a business that has been losing money for some time.

 Lisa is the Chief Financial Officer of a capital-intensive manufacturing company.  The VP of
  • Devesh is the CEO of a diversified

industrial company.

  • His business development team

has proposed purchasing a firm

whose offerings would

complement the product line in one of the company's core businesses.

 Devesh is the CEO of a diversified industrial company.  His business development team has
  • However, the potential stretches

the company’s financial structure.

The authors have devised a 12-question checklist to help managers examine whether a team has explored

The authors have devised a 12-question checklist to

help managers examine whether a team has explored alternatives appropriately, and gathered all the right information. These 12 questions were divided in three

categories:

  • Questions that the decision makers should ask themselves,

    • Questions they should use to challenge the people

proposing the course of action, and

  • Questions aimed at evaluating the proposal.

Questions that the decision makers should ask themselves
Questions that the decision
makers should ask themselves
  • This is based on the principle of self interest.

  • Self interest is taking advantage of opportunities without regard for the consequence of others.

  • For e.g. Bob who is vice president of sales in a company should consider the impact that his decision

will have on the commissions of his sales team-if

bonuses are paid on revenues

 This question talks about “affect heuristics.  The “affect heuristic” is a principle for making
  • This question talks about “affect heuristics.

  • The “affect heuristic” is a principle for making fast,

perceptual judgments based on impressions of goodness/badness.

  • For e.g. Devesh when deciding an acquisition should see

whether his business development team is under “affect

heuristic”. Is the team making decisions only keeping in mind

the benefits the acquisition will have on one of its product line and not considering other merger risks and financial

implications

 It is possible that when making decisions in a group that the group pressures for
  • It is possible that when making decisions in a group

that the group pressures for conformity. This phenomenon is called groupthink and can hinder performance.

  • Groupthink is especially likely if there is little diversity of

background and viewpoint within a team.

Questions Used to challenge the team making recommendations
Questions Used to challenge the
team making recommendations
  • saliency bias occurs when the decisions are overly influenced by an analogy or association to a memorable success.

  • For e.g. the business development team advocating the acquisition to Devesh might be a possibility that they have

been influenced by a recent successful deal of acquisition.

  • the danger is that the analogy may be less relevant to the current deal and can lead to misleading directions in decision

making.

 When trying to solve a problem, individuals and groups tend to gather information selectively and
  • When trying to solve a problem, individuals and groups tend

to gather information selectively and only seek evidence that

supports their decision. This is an example of confirmation bias.

  • Confirmation bias is selecting and using only those facts that support our decision and only selecting information that the decision maker wants to.

  • A good practice is to consider all the alternatives for e.g. Bob should consider other options such as a targeted marketing

campaign or to use promotional strategies.

 One challenge executives face when reviewing a recommendation is the What you see is all
  • One challenge executives face when reviewing a recommendation is the What you see is all there is assumption.

  • Because our intuitive mind constructs a coherent narrative based on the evidence, we tend to overlook what is missing.

  • Devesh for instance, found the acquisition proposal compelling but he overlooked all the legal requirements.

  • In this case Devesh should have checked for availability bias which is that if

his employees had to make this decision in a year's time, what information

would they want and can they get more of it now?

  • They should use a checklist of the data needed for each kind of decision.

7. Do you know where the numbers came from?
7. Do you know where the numbers came
from?

Anchoring Bias- occurs when the individual overly rely

on a specific piece of information to govern their

thought process Types for Anchoring bias in business decisions:

  • Best Guess

  • Extrapolations from history

  • Deliberate anchoring

7. Do you know where the numbers came from? Anchoring Bias- occurs when the individual overly
8. Can you see a halo effect?
8. Can you see a halo effect?

Halo effect is the perception of one trait which is influenced by the perception of another trait Simple practice should be to first assess the relevance of the comparison.

8. Can you see a halo effect? Halo effect is the perception of one trait which
9. Are the people making the recommendation overly attached to past decisions?
9. Are the people making the
recommendation overly attached
to past decisions?

Sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

8. Can you see a halo effect? Halo effect is the perception of one trait which
QUESTIONS FOCUSED ON EVALUATING THE PROPOSAL 10. Is the base case overly optimistic? ↗Overconfidence- overestimation of
QUESTIONS FOCUSED ON
EVALUATING THE PROPOSAL
10. Is the base case overly
optimistic?
↗Overconfidence- overestimation
of ability

Planning Fallacy- overestimation of rate of work or underestimation to get things done

Failure to anticipate about response

QUESTIONS FOCUSED ON EVALUATING THE PROPOSAL 10. Is the base case overly optimistic? ↗Overconfidence- overestimation of
11. Is the worst case bad enough?
11. Is the worst case bad enough?

Scenarios for bad or worst case Premortem (imagine the worst condition and make up a story)

11. Is the worst case bad enough? Scenarios for bad or worst case Premortem (imagine the

12. Is the recommending team overly cautious? Loss Aversion- People generally prefer to avoid losses rather

than gaining profits Explicit choices about what level of risk they will assume

11. Is the worst case bad enough? Scenarios for bad or worst case Premortem (imagine the
 Review the recommendations systematically before finalizing or locking the decision.  Careful monitoring enhances the

Review the recommendations systematically before

finalizing

or locking the decision.

Careful monitoring enhances the quality of the decision

 Review the recommendations systematically before finalizing or locking the decision.  Careful monitoring enhances the
 Is it important to use the check list when need.  We can not use
  • Is it important to use the check list when need.

  • We can not use the check list in every situation

  • The checklist should be use in a systematic approach rather than using it carelessly.

Who should conduct the review?
Who should conduct the review?

When making a decision it is very important that decision makers should make a systematic review of the recommendations. It is really important that there should

be a real separation between the decision maker and the

team making the recommendation. A clear sign of biasness happens between the decision and action stages.

 It is the job and responsibility of the executives to be systematic.  He should
  • It is the job and responsibility of the executives to be systematic.

  • He should know how and when to use the checklist .

  • He should know how to manage the workforce and the situations

sensibly.

  • Organizations need to realize that a disciplined decision-making

process, is the key to a sound strategy.

Cost and benefits
Cost and benefits
  • Effective decisions save the cost and time of organizations. Certain

decisions if not made on time can result in heavy losses.

  • It is important to eliminate the element of biasness from decision

making as soon as possible this can prevent a loss of an opportunity

or a loss of some cost.

  • A recommendation having a biasness can also result a loss in cost .

  • For healthy outcomes of the decision made, cost benefit analysis

is mandatory .

 This case helped us in analyzing and researching about the dangerous biases that can creep

This case helped us in analyzing and researching about the dangerous biases that can creep into every

strategic choice. It also suggests the remedies to follow in order to avoid being a victim of these biases.

Executives need to realize that the judgment of even highly experienced, competent managers can be fallible. A disciplined decision-making process, not

individual genius, is the key to good strategy.