Why You Need Structured Analysis For Making Major Business Decisions
Every businessperson makes decisions every day – literally hundreds of them. Most of these are micro-decisions. Micro-decisions are those little split-second decisions we all make throughout the course of our day, such as: whether to backup your computer files now or later, how to word the e-mail to that prospective client, how much cream to add to your coffee, etc.
While the outcome of each micro-decision is not usually very impactful to your business success, when looked at as a group they are very meaningful and important.
In addition to these micro-decisions, we are also sometimes faced with major decisions. These are much fewer and farther between, maybe coming up in our lives only a few times each week or each month. Into this category fall decisions such as: which customers to pursue for new business, where to build a new physical store location, which type of server to buy, or whether to sign a two-year contract with your biggest supplier. In a business context, the outcome of our major decisions can represent thousands or even millions of dollars of either upside profit or loss. In other words, they are a really big deal.
How we approach any decision can be called our decision-making process. And, how we tackle micro-decisions versus how we tackle major decisions should be very different. Often, however, many of us tend to take the same decision-making approach for both types.
The Power of Sub-Conscious Information Processing And Intuition For Making Micro-Decisions
Micro-decisions come at us so fast and are so plentiful throughout the day that most of us perform little or no conscious analysis on them. In fact, to do so would be turn us into incredibly inefficient businesspeople. Rather than performing a conscious analysis, we (correctly) rely upon our sub-conscious awareness – including our intuition – to make these decisions. It all happens so fast that we are often not even aware that we are making these decisions. They just sort of happen.
The fact that most of our actual cognitive processes happen below the radar of our awareness is a well-documented phenomenon. In fact, neuroscientists know that only a tiny fraction of what we know and how we think is actually within our conscious awareness at any given time. And, we also know that intuition is powerful stuff.
Indeed, our intuition is exactly what allows us to make all of these decisions each and every day. We are essentially off-loading the hard stuff to our sub-conscious mental processor. We just face the decision, think about it for a split-second, and await the solution to pop into our awareness. Simple – and it works quite well for making micro-decisions throughout the day. However, for major decisions in business or in life, relying upon intuition alone is usually woefully inadequate. And, the alternative analytical approaches that most of us employ are not much better.
The Danger Of Taking Major Decisions Too Lightly
When it comes to making major decisions, most of us put a bit more effort into the decision-making process than we do when making micro-decisions. For example, we might call up or meet with some colleagues to discuss it. Then, after one or two meetings, a decision is made and everybody moves on. However, in many cases an adequate analysis is never even attempted. Rather, we come to decisions which the Nobel Prize-winning (1978) scientist Herbert Simon terms “satisficing.” Satisficing is simply an concatenation of the word “satisfying” and the word “sufficient.” A satisficing decision is one that seems “good enough” because the decision:
1. satisfies our intuitive grasp of the situation.
2. stands up to a quick, back-of-the-envelope analysis.
3. seems to be the best solution among the two or three possible solutions initially considered.
4. is often similar to what we have always done.
5. is the one that the majority of the involved decision-makers agree with.
Limitations Of Human Thinking
The trouble with satisficing solutions is that they are highly susceptible to the well-known failings of human logic. Scientific research has shown time and again some of the ways that satisficing solutions fail due the limitations on our ability to make complex decisions rationally. This is what Simon calls bounded rationality.
Specifically, when left to relying solely upon our intuition, everyone on the planet is susceptible to each of the following cognitive (thinking) limitations and flaws on a regular basis:
1. Defining the problem too narrowly, inadequately, or incorrectly.
2. Approaching the problem with either/or thinking, meaning that the possible solution set is too small – all possibilities are not considered.
3. The human brain’s inability to crunch large volumes of numbers at once. (A $5 calculator will beat 99.9% of even the most mathematically-gifted humans when performing simple two or three-digit multiplication problems – every time).
4. The tendency to forget certain facts about a problem situation due to personal bias and/or limits inherent in human memory.
5. Being unaware of or not taking the time to effectively structure a problem so that it can be properly examined and solved.
6. Being influenced by emotions or feelings about a topic and/or by person(s) involved in the decision-making process.
7. The inability to recognize how our own implicit assumptions about a problem situation affect the way(s) that the solution is approached.
8. A tendency to be risk-averse, meaning we want to stick with what has been done in the past rather than trying something new because it feels risky to try something new.
9. The desire to start with a hypothesis and trying to prove or disprove it rather than starting with an unbiased look at what the data say about what is going on.
10. We have limited time and are therefore under pressure to get things done quickly.
11. We can get a bit lazy and want to get past the decision as quickly as possible by whatever means necessary.
12. Being influenced by power relationships (i.e., agreeing with our boss because he or she is our boss).
13. Inability or unwillingness to find, access and gather together the data required for the analysis.
Given that we are the smartest species on the planet, why are we at the same time so flawed? The reason is this: the human brain evolved to make decisions on-the-spot – in the jungle, on the prairie, on the farm. That’s what we’re good at naturally. However, it is only for a tiny fraction of our history on the planet that we have really had the need – or ability – to solve more complex problems.
The Value Of Structured Analysis
Each of the human cognitive flaws mentioned above makes it incredibly difficult to adequately and sufficiently tackle our major business (and life) decisions using the same approach that we use to make those multiple micro-decisions that we make every day.
It is these much more complex problems of which major decisions are made, and these are the ones that require much more than the application of mere intuition or back-of-the-envelope analysis. They require structured analysis. In other words, we need to devote the sufficient time and resources needed to take a structured approach to our problem-solving. Performing a structured analysis provides the following benefits:
1. Allows us to transcend – or at least recognize – our own inherent biases about the problem situation and about possible solutions.
2. Provides the opportunity for intuition to come into play in formulating possible solutions – while at the same time not allowing intuition to dominate the decision-making process.
3. Gives us the ability to mathematically combine multiple data points or variables into a single number (as a ranking, score, or other easily-evaluated data point). It is much easier to make a decision based upon a single score than try to evaluate the merits of 2, 3 or more variables about each potential solution at once.
4. Forces us to take the time to properly state the problem at hand.
5. Gives us the opportunity to see “what is” before deciding what to do.
6. Provides data-driven, third-party-verifiable documentation which clearly highlight our thinking. Such documentation can be shown to other people who are involved in the decision-making process – as well as to other stakeholders such as clients, partners, investors, and suppliers. The documentation can help us to get buy-in on behalf of those not directly involved in the analysis, moving things forward more quickly and with more mutual agreement on the part of all parties.
The next time you face a major business decision whose outcome will impact your business future in important ways, consider investing the sufficient resources to create a structured analysis. Do this instead of relying upon back-of-the-envelope calculations, ad hoc meetings and intuition to guide you to the right answer.