Flaws in strategic decision making: McKinsey Global Survey Results

http://www.mckinseyquarterly.com/Flaws_in_strategic_decision_making_McKinsey_Global_Survey_Results_2284

The McKinsey Quarterly >

Flaws in strategic decision making: McKinsey Global Survey Results >

Irrational thinking doesn’t just affect individual economic decisions; it affects corporate strategic planning as well. These results highlight the practices of companies that have made successful strategic decisions—and also reveal what the same companies have gotten wrong. >

JANUARY 2009 >

Extracts: >

Since its inception nearly three decades ago, behavioral economics has upset the pristine premise of classical economic theory—the view that individuals will always behave rationally to achieve the best possible outcome. Today it’s clear that the vagaries of individual and group psychology can cause irrational decision making by both individuals and organizations, resulting in less than ideal outcomes. Even the best-designed strategic-planning processes don’t always lead to optimal decisions. A recent survey by McKinsey attempts to assess the frequency and intensity of the most common managerial biases in companies. Specifically, we asked executives about a single recent strategic decision at their companies that had a clearly satisfactory or unsatisfactory outcome, focusing on the role that various biases may have played.1 >

It’s evident from the results that satisfactory outcomes are associated with less bias, thanks to robust debate, an objective assessment of facts, and a realistic assessment of corporate capabilities. A few clear paths to making successful decisions also are apparent. But even when a decision had a satisfactory outcome, executives note several areas where their companies aren’t all that effective, such as aligning incentives with strategic objectives and forecasting competitors’ reactions.2 Also notable is that companies that typically make good decisions focus more on their own ability to execute than other companies do, regardless of the outcome of the particular decision described in the survey. >


Looking ahead >

One of the most frequent practices at companies that make good decisions is the accurate assessment of execution capabilities, indicating that managers should increase their focus on this element when considering strategic options. >

Even satisfactory decisions tend to overlook a good assessment of competitors’ reactions or a good alignment of individual incentives with strategic objectives, suggesting that all companies can improve their decision making by focusing on these practices. >

Given the prevalence of individual and group biases in decision making that these findings highlight, managers could likely make better decisions by actively experimenting with alternative techniques such as prediction markets or other collective intelligence tools, which can nullify many pervasive biases.

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http://www.mckinseyquarterly.com/Flaws_in_strategic_decision_making_McKinsey_Global_Survey_Results_2284




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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.