Bad decisions happen. Resources are invested in new products that flop. Wrong people—underperformers—get hired and promoted. Mergers end up diluting instead of creating value. Surveys show managers agreeing that the majority of important decisions are of poor quality. The apologists for poor management decisions would suggest that engineering decisions are easy by comparison: engineers just look at the facts and decide accordingly. To get to the root of the question, let’s first ask what high quality decisions are and what they are based on.
We make decisions—choices between alternative actions—to achieve values: new, profitable products to sell; productive employees; mergers to increase market share and cost efficiency. A quality decision is one that leads to achievement of values. Arguably, decisions such as those above are complex and can be difficult to make, but we can significantly improve their quality by applying three basic, but often neglected, principles:
1) Adhere to facts. This is the most fundamental principle for making quality decisions, in business or in any other field. This is the engineering approach. To build a sound structure, say, or to drill a productive oil well, engineers must observe facts, and then act accordingly. What is the purpose of the structure to be built? What requirement do the terrain and the location pose? What resources and materials are needed and available? Or, where is the oil reservoir and what are its qualities? Given that, what kind of well design is required?
The same principle and approach apply when making business decisions. The problem tends not to be the gathering and analysis of facts, but the adherence to them. Evading facts that are unpleasant (a competitor’s product is better designed and lower-priced than what we are developing) or that contradict our wishes (the demand for our new product is not as strong as hoped for) is tempting. However, evading facts does not change them, and only by adhering to them can we achieve values, such as profitable products.
Adhering to facts means asking and answering questions, and acting according to the answers. For example, how can the product design be improved? What actions does that require? Or, how to increase demand for the product and through which specific actions?
The two other principles are derived from this first, fundamental one.
2) Think independently. In other words: don’t follow others blindly. This, of course, is a derivative of adhering to facts, with an emphasis on having a primary focus on facts as opposed to other people. If a company’s product is not competitive, it is necessary to identify the root cause (such as poor design or too high of a price), and then to take action to address it—as opposed to just blindly imitating competitors.
Studies have shown that business decision makers violate this principle not only by imitating competitors but by succumbing to groupthink inside the organization: going unthinkingly along with the leader’s decision or with the group consensus. Well-established management teams whose members think alike are particularly prone to groupthink. A formal devil’s advocate role might help—but would not be necessary if all team members followed the principles of adhering to facts and independent thinking.
3) Assess others objectively and grant them what they deserve. This is the principle of justice: adhering to facts when assessing and dealing with people. It is often violated in business decision making. Even engineers who carefully adhere to technical facts are prone to evasion when it comes to people decisions: who to hire or to promote, and when to fire employees. It is easier to hire a friend of a friend than to identify the job requirements, post the job, screen the candidates, interview those shortlisted, and hire the best match with the job’s requirements and the company’s shared values.
The evasive approach is hazardous, because hiring the wrong person is not only expensive (such as training a new employee); he can literally destroy the company. For example, a dishonest employee can defraud the company and bring it to financial ruin. An unproductive employee may cause the morale among others to fall. Therefore, it is crucially important to assess others (employees, but also suppliers and customers) objectively, and to grant them what they deserve: a job, a promotion, recognition, responsibility, firing, demotion, etc.)
These principles—rationality, independence, and justice—clearly apply to business. If consistently followed, they would tremendously improve the quality of business decisions and the profitability of companies. To learn more about these and other principles long-term profitability requires, read my book.