How to stop making dumb, expensive decisions

Recently I spoke to a group of high school business students about dumb business decision-making. And as part of my presentation I listed some major decisions that ended up costing their business owners and shareholders dearly.  The list included:

New Coke – Coca Cola’s disastrous attempt to replace its original soft drink recipe with a sweeter one.

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Ford Edsel – Launched in 1958 and in production for just two years, the Ford Edsel car was a huge product failure, costing the company US 2.8 billion (in 2016 dollars).

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Kiwi Travel International Airlines – The ill-conceived cut-priced airline that tried to take on Air New Zealand and Qantas.

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Fortunately the first two blunders weren’t commercially fatal. In those instances mistakes were quickly acknowledged and strategies formulated to put things right.

Sadly though, in Kiwi’s case, no one in founder Ewan Wilson’s inner circle – including himself – was bright enough or humble enough to admit that the strategy was flawed and needed to be aborted.  So about 18 months after its launch, Kiwi International Airlines collapsed.

In all the blunders outlined above there is one common cause.  What is it? Bad decision-making.  The sequence is quite simple – bad decisions lead to bad results.

Decisions, decisions, decisions….

Decision-making is a key component in the Strategic Thinking skillset, which research has found to be one of the most valuable business and personal skills.  It is a key life skill in other words.

However, there are important  strategic decisions we need to make…and then there are the rest.  Let me explain.

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There are articles on the internet claiming that the average person makes over 35,000 decisions a day.  To me that number is absurdly high and I’ve yet to find the research to support the claim.  However, there is a 2006 Cornell University study that revealed we make just over 200 decisions a day about food alone.  So I think it’s safe to say we make around 1,000 decisions daily, which works out be just over 62 decisions an hour, for the 16 hours a day that the average person is awake.

1,000 decisions a day equals 365,000 decisions per year.  But how many of these 365,000 decisions are significant and truly important?  This is a crucial question to answer because every decision we make has a level of importance attached to it.  On one end of the scale there are routine, non-strategic or even trivial decisions.  Then at the other end we have the strategic, game-changing and highly important decisions.

Strategic decisions offer the potential to dramatically propel us towards an important goal.  Far faster than non-strategic decisions can. And equally, good strategic decisions turn us away from dangerous, high-risk situations and costly, painful blunders.

Think of strategic decisions as 10x decisions.  That is, a dollar or an hour invested in a strategic decision has the potential to return 10 times the investment or more.  Compare that to routine decisions which offer nowhere near the same level of return.  These are what I call 1x decisions.

So how many of the decisions we make are trivial and how many are important?  To answer this question let me quickly review one of the most powerful performance improvement principles you will ever learn.  It’s called Pareto’s 80/20 Principle.

Pareto’s 80/20 Principle is so named because of its discoverer, Vilfredo Pareto, an Italian economist (1848-1923).  Here’s how it came about.

When studying patterns of wealth in 19th century England Pareto discovered that most of the wealth was held by a small minority of the people. In other words, the distribution of wealth was unevenly unbalanced.

Feeling he may be onto something, Pareto then expanded his study to include other countries and time periods.  And guess what?  He found exactly the same pattern – an uneven distribution of wealth with the majority of the wealth being held by a small minority of the people.

Several decades after Pareto’s discoveries, several other 80/20 pioneers, most notably Harvard Professor, George Zipf, and quality guru, Joseph Juran, validated his concepts with studies of their own.

These pioneering studies in 80/20 were a breakthrough in thinking because they led to a greater understanding that a small minority (20%) – be it people, tasks or events – will contribute the majority of the output or results (80%). 

For example, 80/20 studies have found that:

  • A small percentage of movies generate the vast majority of box office revenues
  • A small percentage of criminals commit the vast majority of the crimes
  • A small percentage of sports stars make the most money.
  • A small percentage of school students are the most disruptive.
  • A small percentage of what we learn provides the majority of the learning benefit

In business, 80/20 studies have shown that generally:

  • A small percentage of your customers generate the majority of revenue and profit
  • A small percentage of your products and services generate the majority of revenue and profit.
  • A small percentage of your employees are the most productive.

Keep in mind that the ratio may not always be 80/20.  It may be 75/25 or 90/10 or 60/40.  The key point to understand is the nature of uneven distribution.

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How does 80/20 apply to decision-making?  Quite simply, 20% of your decisions account for 80% of your success or failure.  And 80% of your decisions just aren’t that important in the bigger scheme of things.  In fact one of the world’s leading experts on the 80/20 Principle, Richard Koch, holds the view that nearly all the decisions we make each day – as many as 99% – are trivial.

So if you really want to excel you must focus on strategic decisions, and improve your strategic decision-making. How can you do that?  Here are five suggestions.

1. Focus on the big stuff for at least 3 hours a day

Like everyone else on this planet you are given 24 hours a day to work, rest and play. Yes indeed, time is the ultimate democratiser and equaliser.

Now, give or take an hour or so, you are awake for 16 of those 24 hours.  We’ll use 16 hours for the sake of simplicity.

What to do with your 16 awake hours? Applying Pareto’s 80/20 Principle, at least 20% of your day – i.e 3 hours daily – should be dedicated to doing strategic activities.  These are the crucial activities upon which your strategic decisions are made and are worth at least $1,000 an hour of your time.

At the same time you should reduce the focus on non-strategic activities and decision-making which are valued at $10-$40 of your time.

Some strategic activities you need to focus on?  Take a look at this list:

  • Managing and strengthening your flagship products
  • Keeping in contact and building relationships with A-level customers and prospects
  • Assessing and identifying potential 80/20 customer segments and targets
  • Improving your revenue stream model
  • Identifying, building relationships with and recruiting outstanding talent
  • Writing critical documents, plans, proposals and correspondence
  • Building and managing your inner circle/leadership team
  • Building a distinctive strategic brand
  • Building and generating high-level brand awareness
  • Creating a loyal database and tribe of brand advocates
  • Designing and managing a flexible, dynamic organisational structure
  • Identifying and implementing high-leverage operational efficiencies and systems.  Minimizing significant waste and inefficiencies
  • Optimising strategic costs
  • Improving conversion rates
  • Building a vibrant, high-performance culture
  • Developing and maintaining strong relationships of trust with A-level channel partners, suppliers and centres of influence

And non strategic activities?  Activities on this list include:

  • Writing routine emails and letters
  • Making routine phone calls
  • Performing administrative marketing tasks such as updating a website or database
  • Managing relationships with C-level customers and prospects
  • Performing routine financial tasks such as doing payroll or paying bills
  • Engaging in idle talk, distractions and attending routine meetings

What to do with these non-strategic activities?

  • You can eliminate steps from the decision-making process, thereby making them easier to perform.
  • You can use technology to simplify them.  For instance, the use of cloud accounting like Xero or MYOB for accounting tasks.
  • You can ignore or avoid them.
  • You can delegate them.

Again, you should reduce the focus, time and energy on non-strategic activities and associated decision making by implementing some of the steps outlined above.

2. Use experts to assist you with strategic activities and decision-making

More specifically, the key is to form and use a team of experts, or an expert team.   An expert team will provide the analysis, advice, ideas and implementation skills you need to think and perform to your best.  The expert team is a critical ingredient to your business success.

My concept of the expert team is an extension of Napoleon Hill’s principle of the master mind. In his best-selling book, Think and Grow Rich, Hill defines the master mind as, “the coordination of knowledge and effort, in the spirit of harmony, between two or more people, for the attainment of a definite purpose.”  Hill then added that, “no individual may have great power without availing himself of the ‘master mind’.”

An expert team can also be called an inner circle or leadership group and comprises individuals who have expertise, skills, knowledge and ideas that you yourself do not possess at a high level, but which are necessary for the achievement of your goals.  An expert team is much more than a collection of minds.  It is a collection of minds and skills.

Here’s one example of the expert team in practice. Although Lydia Ko is ranked as the world’s best women’s golfer, her success cannot be attributed just to her talent, work ethic and determination. She has a strong support team that includes her agent, coach, caddy and family who all play important roles in her development and success.

Having a great expert team or inner circle is crucial to helping you make better strategic decisions.

3. Apply neutrality

At university one of my professors, Bob McQueen, often spoke about the “peril of salesmanship” as it relates to analysing situations and making decisions.  Salesmanship  – according to Bob – is when you start an analytical and decision making process with a pre-determined view.  It’s a bit like being on a jury and deciding beforehand that the defendant is guilty.  Another word for salesmanship is bias.  And it’s the last thing you need when trying to make a strategic decision.

Instead, you need to be neutral.  Put aside any biases and if you can’t do that then you need to remove yourself from the decision-making process altogether.

4. Be calm

Many years ago I was in a meeting with representatives from several other companies, together with the general manager of a firm we were negotiating an important project with.  As the meeting progressed and reached a crucial part of the negotiations the atmosphere became quite tense due to one of the attendees becoming highly agitated.

The GM’s response? He calmly took his folder, put it in his briefcase, stood up and said something along the lines of, “We cannot think clearly under these conditions.  Let’s adjourn the meeting and come back when the atmosphere is better.”  Then he walked out of the boardroom.

At the time I was quite stunned and didn’t quite know what to make of what happened.  But then I realized how right the GM was.  To make good decisions we need calm heads – especially when the pressure’s on.

During the last 20 minutes of the 2011 Rugby World Cup final the most influential player on the field was New Zealand captain Richie McCaw. Why?  Because he was calm under pressure and made several crucial decisions that helped New Zealand to win the game.

Just like Richie, when making strategic decisions you need to keep calm – especially when under pressure.

5. Follow an awesome decision-making process

In one of his firm’s annual meetings investment guru Warren Buffett outlined a formula he follows to help him make investment decisions:

“Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain.  That is what we are trying to do.  It’s imperfect, but that’s what it’s all about.”

Here’s another way to state Buffett’s formula.

Probability of gain x size of possible gain minus Probability of loss x size of possible loss = Decision

If the gain probability far exceeds the loss probability, then the proposed investment is a good one.

Obviously, this formula comes as part of a large amount of homework Buffett does on a business.  In other words, it is part of a process he follows in assessing such factors as a firm’s competitive landscape, economic conditions, management, culture, products, marketing, brands and financial performance.

The key word? Process.  Put simply, Warren Buffett follows a systematised decision-making process using proven tools to help him make great investment decisions.  And as he one of the world’s richest men, his process obviously works.

In your quest to make better strategic business decisions you too need to follow a process using proven proven models and tools.  For instance, you may want to use a decision-making tools like this one:

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I’ve stated before that a decision making process and tools are just like a recipe, ingredients and tools used to make a delectable chocolate cake.  That is, you follow the recipe (process) using the required tools and ingredients.  And if you follow the recipe to the letter you should end up with a delectable delight.

Ultimately, good strategic decisions give us the best return on investment in terms of time, energy, money and other resources invested.