The value of a strategic decision

getting more value from your decisions
… a boardroom fable

Genesis Management Consulting
Limited
“improving lives
through better decisions”

Chapter 1

setting the scene

Brad
Facing disaster

Genesis “improving lives
Management Consulting through better decisions”

setting the scene
The mood in the Boardroom is tense ….

Brad, the CEO of Marcon Limited, is clearly annoyed and frustrated as he taps
his fingers impatiently on the table.

24 hours earlier, the major investor of Marcon had told Brad that if he could
not turn the company around – and rapidly – he would find someone who
could.

Brad was facing personal and professional disaster – and his senior team did
not seem to be helping him at all.

Brad: CEO:
annoyed and frustrated
and facing disaster!


setting the scene

Linda, the CFO, who had just delivered the even-worse-than-expected quarterly results is the
focus of attention – although she feels like the messenger that is about to be shot. “I just
measure the results, it’s the operational and sales people who have screwed it up”, she
thought to herself.

Greg, the Head of Operations can see his most important project, the technology-based QUIP
(quality improvement project) is at risk of being canned.

While Maria who leads marketing and sales is facing the prospect of being forced to lay off up
to 20% of her people and slashing her advertising budget.

Brad says: “ I see no other way out. It seems the only way we
can slash our costs is to take these two tough, but necessary
decisions: cancel Quip and strip 20% out of our marketing
and sales area.

Linda : CFO:
it’s not my fault !

facing the facts …
Gail, the Director of Strategy decided it was time to put her point forward.

“The way I see it is this:

“We have made a loss in the last quarter which follows a trend apparent for the last year.
Every quarterly review we manage to convince ourselves that things have reached the
bottom and will start to upturn. It is time we stopped kidding ourselves and admit that if
we do nothing differently, in 3 months time we will be drowning in a sea of red ink.

“There are two proposals on the table that have arisen out of the
discussions we have had this morning.

“The first is cancel QUIP – our manufacturing project aimed at
improving quality.

“The second is to cut significant costs out of our marketing and
sales area.”

Gail: Director of Strategy
facing the facts

the upside and the downside
Gail continued:

“Combined, these decisions appear to offer the benefit of reducing costs
by almost $25 million. But there are significant possible downsides:

“Firstly if our quality does not improve, our gross margin is going to shrink
further - to say nothing of our reputation in the market. Scrapping QUIP could
have that effect.

“Secondly, cutting back on advertising and our sales force could also impact on
the top line significantly. And what it would do to morale does not even bear
thinking about.

“My rough calculation is that if we get these decisions wrong, there
is a potential net downside of $10 million – and frankly a hit like
that would leave us on the verge of bankruptcy.

“I know time is of the essence, but are we really ready to make
these decisions today?”

the value of the decision

“Thanks Gail, that feels like a sensible summary.
Could you maybe pull that together into one of
those insightful sketches of yours”


Chapter 2

decision value

Gail:
the stakes are high!


the possible outcomes of the decision
“We seem to have been forced into hurrying these two decisions – and
frankly, I am not sure if the decision process we have taken has been
optimal.

“Sorry if this sounds like Decision-Making 101, but any decision can be
made well or poorly. Both of these options may have two possible results: a
good outcome or a poor outcome.
Schematically it could be depicted like this:”

Good outcome
Good decision
process
Poor outcome

Decision
Good outcome
Poor decision
process
Poor outcome

the mathematics of the decision
Seeing that most of the team were nodding, the Director of Strategy
pushed on:

“Now, using some rough estimates, let me throw some stats around:

•The probability of us having followed a good decision process is about 70%
•The probability of us having followed a poor process is 30% ….

Gail could see she was losing Greg with her numbers
so she moved back to her drawing

Greg: Operations Manager
confused

the mathematics of the decision
Gail apologised:
“Sorry, that was not a good way of getting my message across.

“Let me simply apply some rough probabilities to my drawing.

“For instance, let us say there is a 70% chance of us following a good decision
process and a 30% possibility of being less thorough and getting the process
wrong … we can depict that as follows.”

80% Good outcome
Probabilities Good decision
70% process
20% Poor outcome

Decision
5% Good outcome
30% Poor decision
process
95% Poor outcome

decision value calculation
Then if we apply my earlier estimates where
• a good outcome would result in an improvement of $25 million and
• a poor outcome would result in a deterioration of $10 million,

and multiply the outcomes by the probabilities then our decision value can be
estimated to be about + $10,1 million.
Calculation example
70% x 80% x 25m = 14,0m

80% Good outcome
+ $14,0m
Good decision + $25m
+
70% process Poor outcome
20% - $1,4m
- $10m
Decision +
5%
Good outcome + $0,4m
Poor decision + $25m
30% +
process Poor outcome
95% - $2,9m
- $10m

Value of decision calculated by Decision value =
summation of all possible outcomes + $10,1m

Chapter 3

making it complicated

Maria:
That is too simplistic


simplistic thinking
The ambitious Maria, who had received a PhD in statistics at MIT before changing
career to a more exciting marketing role (and was blatantly maneuvering for Gail’s
job), was shaking her head.

“Gail, you are over-simplifying the situation. I question your use of discrete
numbers as possible outputs. Plus we should be considering running Monte Carlo
simulations to really get proper estimates.”

Maria : Marketing and sales
(Wants Gail’s job.)

Greg: WTF ?

simplistic thinking
Gail replied:

“Maria, you are theoretically correct and I would love to get into that level of
sophistication. However, I only wish to show how, with a little more effort, we
should be able to be more sure of a favorable outcome.

“In fact I would like to make it even simpler.”

Maria decided she had proven her technical knowledge and so nodded in consent.

Maria : Point made.
Smiles sweetly at Brad, the CEO.

even simpler …
Using one of Brads favorite expressions, Gail said:

“To get everyone back on the same page, let’s make it even
more straightforward. There are two ways this can turn out:

“Get it wrong and bust the company”


even simpler …
“Get it right and save the company, our jobs and all the other
people who are depending on us !”


Chapter 4

the wider consequences

Linda:
Think broader


wide-ranging consequences
Linda the CFO, looking slightly disheveled after her earlier discomfort, rejoined the
discussion.
“I would like to add to that thought. The other day, I was talking to some people
from a company called Genesis, who are experts on decision making. They were
speaking about the wide-ranging impact of decisions beyond just finance and
used this picture to explain their point.”

She pushed a colorful picture of ripples and dropping water into the centre of the
boardroom table.

The decision ring “My point is we should consider
of influence
other possible consequences of
the decision. “

Linda : CFO
Disheveled, but still engaged

many can be impacted by poor decisions …

Reputation Customers
Employees
Shareholders Community

was this a good decision?

“ … and here is a good
example of a decision that
may have been financially
sound, but did they think of
the consequences?”


back to order …

Brad tried to bring the meeting back to order:

“OK Linda. You are absolutely right and it is imperative we
bear these consequences in mind.

“But Gail, you really got our attention with your last
few diagrams.

“I think you were about to tell us how we might do a
better job with these decisions.”

Chapter 5

improving decision value

Greg:
Prefers it simple


Gail continues …
Gail responded:

“Thanks Brad. While Maria and Linda were making their
valuable contributions …”

Maria visibly flinched at Gail’s delicate sarcasm.

The Director of Strategy, with a slight smile playing on her lips, continued:

“ … I managed to put my schematics onto my iPad3 as a way of demonstrating where
we might improve the value of our decision making. ”

She plugged her Apple into the projector and the image filled the screen.

Maria : Marketing and sales
not so happy

improving the value of the decision …

“I have run a few numbers to test probabilities and outcomes.
Without getting into the calculation …”

Everyone heard Greg’s sigh of relief

“A relatively small amount more effort in the
decision process and planning the execution,
would give us a dramatic impact in our
probability of success.”

“In fact, the decision value would move from $10,1 million to $13,1 million!”


how much ?

$ 13,1 m

$ 10,1 m
“So by putting a little more
effort into our decision process
we can increase the probable
decision value by 30%?”

Brad sounded incredulous.


yes, but how …
Brad, becoming animated, encouraged Gail to continue.

“That’s interesting theory and I like where you are taking this.
But so far you have told us where we might impact on the
decision-making. Do you have any ideas about how?”

Gail replied:
“Brad, coincidentally I also met with the Genesis chaps the
other day and still have part of their presentation to me on
my iPad.

“With your indulgence, I would like to flip through some of
their material as I think it answers your question perfectly.”

Brad nodded in agreement.

Maria : thinks :
“Damn, why did I not speak to Genesis”

Chapter 6

where things go wrong

What happened?


there are two key areas

“There are two areas where we must focus: making the decision and executing
the decision.
(Here Gail cleverly was able to show some of the errors that had been made,
without actually accusing anyone of having made mistakes!)

“I first want to take you through what can go wrong, then move to looking at what
can be done in these areas?”

Making the decision Executing the decision

How to improve the probabilities?
First understand where things can go wrong in the decision process

Good decision
process

What can go wrong?

Poor decision
process

What can go wrong?

The next 2 pages are taken from “The 7 Habits of Highly Effective Decision Makers”

and show some of the typical pitfalls …..

Research has revealed many areas where we can stray
from being rational decision-makers:

Decision process errors
like unclear decision rules
Data errors
as in forgetting
underlying assumptions

Uncertainty problems such as miscalculation of risks

But even greater challenges are …

…the errors that arise from things buried in the
unconscious of the decision-makers … or at least on
the periphery of their consciousness:

Mental process faults Communication
as in missing the challenges
inter-relatedness of such as not recognizing
issues different perspectives

Ignoring decision psychology
like seeking confirmatory
evidence only

How to improve the probabilities?
Understand where things can go wrong in the execution

Why might a good decision process still end up with a poor outcome?

Unexpected Bad implementation Unforeseen event
competitive reaction “handoff”

so what should we do?

The potential benefits We know things can be
are significant! improved.

So what are they type of things we should be doing here
to increase the probability of success?

Chapter 7

how to improve

Genesis:
Taking and executing decisions


there are two key areas
Gail continued:
“Genesis have some great images summarizing, in the form of
check-lists, how those problems may be overcome and how
decision taking and execution may be improved.”

Making the decision Executing the decision

taking the decision

There are 4 broad areas that should be
considered when improving the taking of
decisions:

Process
People
Tools and technology
Behavior and psychology


how to take the decision
use this checklist… Detailed check-
list in appendix

all of the scenario data visualisation
steps development rigor techniques
correct tools & systems
process
frame technology thinking
appropriate risk
timing assessment
right aware of
inputs heuristics
role behavior & role of
people
clarity psychology intuition
challenge & communication group mental
governance clarity dynamics models

executing the decision

When considering execution of decisions,
the planning of the execution may be as
important as the implementation itself.

Much research shows that decisions, like
strategies, fail in their implementation. What
the research fails to mention is that often the
“seeds of (implementation) destruction” are
sown in the development phase.


how to execute the decision Detailed check-
use this checklist … list in appendix

use of real options key performance programme change
eg limit the downside indicators governance management

implementers in executive
decision process sponsorship
Pre
Execution
execution
scenario resources
assessment match effort

contingency benefits programme review decision
planning tracking management process

Chapter 8

review the decisions

Brad
“Form a task force”


positive reaction
Brad had obviously liked what he had seen:

“Gail, it seems you and Linda have picked up a lot from these
guys. Although my initial reaction was that I am already an
expert decision maker (that’s why I am the CEO), I now really
believe that as a team we could go about this task a little
better.”
Gail replied almost humbly:
“To be honest, I had also believed that there was not a
lot these consultants or coaches or whatever they call
themselves, could do to improve my decisions.

“But on reflection, I realized that decision making is a
skill that can be learnt and continually enhanced and
that can only help me in career and life!”


task force required
“So Gail, I agree with your initial assessment that we must
do something different to survive and we need to do it
urgently.

“But the message I have picked up is that we must review
these two decisions in the light of the material we have
just seen.

“Would you please compile and lead a task force that rapidly
undertakes that review; and then lead us through a better
decision process within the next week?

“ This is critical to our survival – so get whatever resource you
feel is necessary.”

Maria :
“I’d better get on that team too ! ”

the task team
Gail, using her strong emotional intelligence involved both Greg, Linda
and Maria in the task team.

Given the short time-frame and the importance of the decision, she also
called in Genesis to facilitate the process and bring in their technologies
and expertise.

Together they developed a short, but intense intervention.


the process undertaken by the task team
Insights from market and other perspectives

QUIP decision
Decisions Decision
Greater rigor
reviewed execution
and structure
Sales & concurrently assessed
marketing
decision

Application of process and tools from Genesis

Decision process and
best practices
Insights gained using available at
THOUGHTstream
GenesisMC
Decision
Shop

Chapter 9

the critical factors

Gail:
Key insights


looking back …..
A year later, Gail was interviewed by the prestigious
Wall Street Times and asked what had been the
critical factors that had resulted in Marcon’s
success.

She recalled:
“In that week of intensive review, challenge, digging
and searching for creative answers, there were two
key insights that convinced Brad to change his
decision and put us on the road to success.

“They may look straightforward, and even obvious, but the key to great decision
making is identification of those few critical issues among the mountain of
interesting, but less useful data.”


key factor 1: re-framing the decision

“We decided to frame the decision differently which resulted in an
important shift in focus from internal to internal AND external.”

Reduce costs by $25 million
(Internal focus)

Increase profit by $25 million
(Internal and
external focus)


key factor 2: systemic problem
“We discovered a very important systemic problem that
linked market dynamics to our manufacturing activities.

“Basically, we were losing share as we tried to cover the
entire market. Our sales force, unable to meet quotas kept
demanding more products. This added cost and complexity
to our manufacturing – eventually driving us to try and
manage the complexity with better technology – hence the
QUIP project.

“At the same time, marketing this ever increasing product range to wider
audiences pushed our promotion costs ever higher too.

“The diagram on the next page gives a little more detail … but you can see the
vicious cycle that we were propagating!”


key factor 2: systemic problem
“We discovered a very important systemic problem that linked market
dynamics to our manufacturing activities.”
•Marcon competing across all market segments, but competitors have narrower focus
•Confusing value proposition makes Marcon products harder to sell
•Sales force push for even more products to achieve quotas
•Increased product range increases complexity of manufacturing & increases cost and quality problems
•Quality and product range make it harder to sell and so market share shift to competitors
•Competitors able to drive down costs and enhance value proposition – further gains in share
•Meanwhile Marcon launches QUIP to handle manufacturing complexity and reduce quality problems

Insight gained while
using EIDOS software

women in decision making
In her closing remarks to the interviewer, Gail made
an important point:

“As a member of ‘Woman in Leadership’, I would like
to emphasize how our balance of men and women in
the task team was incredibly helpful. I do not wish to
be overly-provocative or to stereotype but many
women are far better at seeing the big picture and
how issues inter-relate than men – who tend to be
better at breaking things down into their sub-
components.

“I believe it was the blend of this different type of thinking that contributed greatly to
our success. One of the outcomes of our working with Genesis is my agreement to
cooperate with them to investigate the power of gender balance in a decision team.”

(Note: a real investigation on this theme is commencing in March 2012, if you are interested in taking part, or
receiving the results, drop us a line at women-in-decisions@genesis-esp.com )

Chapter 10

a happy ending


happy ending ….
The review of the decisions resulted in QUIP still being scrapped, but with an
agreement to cull 40% of the product line that significantly reduced manufacturing
complexity resulting in both lower unit costs and improved quality.

The marketing and sales decision was changed. The advertising budget was reduced by
10% and the sales resource was spread across a narrower target market and so
ensuring greater focus.


even happier ending …
The company saw a miraculous turnaround with profits
rebounding substantially.

Brad was head-hunted and moved to a new, larger
organisation (where it is rumored he has called in Genesis to
assist him in improving the decision making competency in
the company).

Gail is the new CEO and has appointed Maria to Director of Strategy.


Chapter 11

The moral of the story

We can improve lives
through better decisions


the moral of the story …
Few Business Schools, Directors Courses or even Universities give specific
training on taking critical decisions in complex environments.
Management are expected to learn by trial, error and observation.
That can be expensive!

Decision process and
best practices
available at
GenesisMC
Decision
Shop

Or click here for sample

Decision coaching (individuals and teams), training and development can all help to build
the competency within your team.

Contact Simon Gifford at sgifford@genesis-esp.com for a no-obligation discussion


the story and acknowledgements
Although loosely based on a true story, names and faces have been changed
to ensure appropriate privacy.

Marcon is a fictional company – the name arising from a merger of the names
of my sons: Marc and Devon

Thanks to all who contributed advice and input to the development of the
theme and design – especially: Rhonda Stewart, Heinz Weilert, Karola
MacArthur, Nic Labuschagne, Judy Martin and Mandy Conidaris.

Movie rights are up for auction to the highest bidder!

Fictional characters

Appendix

Check lists for taking the decision and
executing the decision.
Calculation of decision value.


How to make the decision
check-list (part 1)

All of the steps Are all the steps in the decision making process being followed?

Correct frame Is the decision framed correctly? (are you asking the right question?)

Appropriate timing Is the decision being made at the optimal time (too late, too early) & are you
allowing the proper focused time
Right inputs Are all the relevant facts, statistics, opinions, etc available

Role clarity Are you clear of the roles eg who is advising, who is deciding, who can veto, etc

Challenge & governance Has sufficient challenge been brought into the process? Are negative views allowed
to be aired?
Communication clarity Are the communications within, and after, the decision sufficiently clear

Group dynamics Is the leader of the group aware of the group dynamics at play and knowledgeable
how to handle them
Mental models Have all mental models been sufficiently surfaced? Have the underlying
assumptions been tested?


How to make the decision
simple check-list (part 2)

Role of intuition Have intuitive inputs and judgments been given appropriate weight (too little, too
much, ..)
Aware of heuristics Are the team members aware of the heuristics their minds may be using to make
judgments – and how to combat them where necessary
Risk assessment Have the underlying risks been accurately assessed and are there contingency
plans in place
Systems thinking Is the context of the decision clearly understood – including the inter-relationship
of all the factors
Visualisation techniques Have visualisation techniques been used to combat complexity ,catalyze creativity
and clarify communications
Data rigor Has the data been rigorously analyzed and challenged? Has raw date been
converted into new insights?
Scenario development Were future scenarios developed that describe the possible futures within which
the decision will be enacted? Have strategic options been tested within those
different futures?


How to execute the decision

Use of real options Has real option thinking been used to better manage risk and increase the upside,
or decrease the downside, of the decision?
Implementers in Have those people who will be responsible for implementation been involved in
decision process the decision process
Scenario assessment Is the unfolding context being checked against the possible scenarios that were
developed ?
Contingency planning Are contingency plans in place and are the indicators being checked to know if
they should be actioned?
Benefits tracking Is there a benefits tracking system in place to ensure that the expected value is
being achieved?
Programme Are the individual initiatives arising from the decision being managed within a
management coherent programme?


How to execute the decision

Review decision process Are decision processes reviewed AFTER implementation to assess the success of
the process and learnings incorporated into future decisions?
Resources match effort Are sufficient resources available, and being applied, that are appropriate given
the importance and value of the decision.
Executive sponsorship Has the implementation programme got sufficient, and obvious, senior
management support
Change management Are the change requirements sufficiently understood and are they being tackled?

Programme governance Is the programme being overseen by the appropriate team; and are governance
processes in place to allow for flexible implementation
Key performance Are the performance indicators (results and leading indicators) clear and being
indicators measured and managed?


the result of improving the probabilities?
“Let us say we could improve the probability of undertaking a good decision
making process by 10% (from 70% to 77%) and we can improve the odds of a
good decision having a good outcome by 5% (from 80% to 84%).

“The impact would be a new value of $13,1m – a 30% improvement!”
Calculation example
77% x 84% x 25m = 16,2m

84% Good outcome
+ $16,2m
Good decision + $25m
+
77% process Poor outcome
16% - $1,2m
- $10m
Decision +
5%
Good outcome + $0,3m
Poor decision + $25m
23% +
process Poor outcome
95% - $2,2m
- $10m

Value of decision calculated by Decision value =
summation of all possible outcomes + $13,1m

Genesis Management
Consulting Limited

Genesis is a strategy consulting firm with a mission of
“improving lives through better decisions”

We do this by building individual and organizational competency through:
• Decision coaching
• Decision consulting
• Decision training
• Decision support

For queries on in-house presentations or further information, please contact
Simon Gifford at sgifford@genesis-esp.com
or visit our blog at www.genesismc.co.uk/blog
and our web-site at www.genesis-esp.com


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