The bad decision devil on your shoulder

July 31, 2015 10:33 am
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Management is essentially a process of making a large number of decisions on a daily basis. Whilst many of these decisions can be quickly and effectively made using a judgement call from the individual, the solution to key strategic issues may not be so easy.

Decisions that a leader needs to make regarding these issues are significant, they involve multiple dimensions of value, potential options and stakeholders, and the potential outcomes of these decisions can be unclear at the time.

To ensure they make the right call, senior leaders use a range of decision-making tools and techniques. But despite using the best modelling and data analysis, key influential leaders will inevitably make bad decisions from time to time.

Perhaps there might be a little devil on their shoulder that leads them to a damaging decision? Very unlikely, although some of us might debate that, given some of the leaders we have encountered. So the question must be asked, what causes otherwise highly intelligent and capable leaders to make serious errors in judgement on key strategic decisions? The answer may not be as simple as we all think. Key research [1] shows that these errors in judgement are caused by two key neurological phenomena living within all of our subconscious; pattern recognition and emotional tagging.

Pattern recognition occurs when a decision maker is faced with a situation that is similar to a decision that they have made (or seen made) in the past. Whilst this can and does lead to a lot of sensible decisions being made as a result of learning from mistakes, recognising similarities between the two situations can give the decision maker the feeling that they understand the situation better than they actually do. This feeling of familiarity may cause the decision maker to ignore key information regarding the situation that is contrary to what they believe should be the case. This leads the decision maker to a decision that would not have been made based on completely objective analysis. A simple example of this would be when a person is buying a car and having to decide between a Hyundai and a Volkswagen. The buyer, who has previously had a bad experience with the lower priced car, may recognise a correlation between price and quality and therefore choose the far higher priced Volkswagen (ignoring the fact that the Hyundai car has outperformed Volkswagen in quality and customer approval ratings).

Emotional tagging is the process in which emotional information from a person’s memories or experiences attach itself to a situation and tells a decision maker how they should feel about a certain decision. This can lead to bad decisions, as the decision maker may feel negatively about a decision that all available information is suggesting needs to be made (or vice versa). An example of this may be when an executive is faced with a situation of closing down an underperforming division and the choice is between a division they used to work in and a division they didn’t used to work in. The executive may favour one over the other based on the emotions they feel regarding the decision (again, ignoring key information that may contradict their decision).

So, how do we stop ourselves from becoming our own worst enemy? By recognising bias and removing it from the decision-making process. The same research that identified the two key forms or subconscious bias also identified three key ‘red flag’ conditions that can be used by managers as indicators to identify when a decision maker may be adversely influenced into making a bad judgement call. These conditions were:

  1. Inappropriate self-interest (the decision adversely affects the individual making the decision)
  2. Distorting attachments (the decision affects an area, population, place or product significant in the decision makers past or future)
  3. Misleading memories (the decision has similarities to a situation previously experienced by the decision maker)

By implementing decision making tools and by gearing analysis techniques toward fostering debates between stakeholders and decision makers, these red flag conditions can be identified and managed. Robust governance involving stakeholders with no emotional bias or conflicting interests should be brought in to the fold to safeguard the key decision making process from these red flag conditions. Exorcise the bad decision demons and favour the business angels of logic, numbers and facts.

Written by Sam Byrnes

Ref: [1] Campbell, A & Whitehead, J & Finkelstein, S, ‘Why good leaders make bad decisions’, Harvard Business Review, February 2009 pp 2-5

Packed into the wrong format

July 8, 2015 8:35 am
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How did we end up with the packaging formats that exist today?

There are three formats in particular which drive inefficiency, and if the market was not so heavily invested we could change these tomorrow…

Cages for Milk

The milk industry has an expensive Shelf Ready Packaging system that involves the use of metal cages. In the factory, machines that fill these are fully automated and quite often so are the Cold-store picking lanes. Yet this seems to be one of the biggest causes of downtime. Moving cages tend to get damaged which creates downtime, peak periods see a shortage and the continued replacement and repair costs mount up, not to mention the supply chain that is required to circulate.

Shrink wrapping could be one answer, but this would need combining with some form of shelf ready packaging, perhaps a cardboard version of the current cages with trolley wheels to provide mobility.

Cereal Box

The cereal box has stood on its soap equivalent for years. Supermarkets would not be the same without the endless walls of wasted cardboard. Manufacturers have invested in automation and have locked us into this until not only the depreciation drops off and the asset is ready for replacement, but when this and the customer perceptions align which seems decades away.

Yet a few companies have moved away from the outer box in search of a modern packaging format with reduced material costs, gaining higher processing efficiencies and removing equipment costs. Just like our award-winning friends at Jordan’s Cereals.

Glass Jars and Bottles

Heinz made the switch, utilising a “squeezy” bottle to sell the concept over a decade ago, with Marmite (for our Aussie friends Vegemite) and some honey brands following suit, but most of our pasta sauces and jams remain in expensive glass. That is without mentioning beer which some brewers are starting to consider. The 2012 Olympics saw Heineken provide beer in a PET format for the first time, but would you enjoy a cold refreshing beer in the garden quite so much if it were served in a plastic bottle?

Could our 2020 vintage champagne have more than just a plastic cork? Probably not but there are three reasons things may change.

Consumers – Some changes might be driven by new formats, reduced packaging and a better overall impact on our Carbon footprint. Yet this also might be what holds us back the most.

Innovation – Investing in R&D to find new processes, balancing the writing off of assets against leading the market. But equipment manufacturers are unlikely to want to revolutionise a cash cow and lose their market share, we need to encourage innovations across boundaries.

Cost – A point in time may come where the manufacturing savings across efficiency, materials, waste and distribution means the change is a necessity. Rather than waiting for that to happen and being on the back foot, we would suggest you know what that point is now and start planning for it.