Fw23-the Decision Making Process

FW23-THE DECISION MAKING PROCESS YOUR POSITION Look at the Map MAP

185 days before opening. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

INTRODUCTION Time is coming to decide. Firstly, do you really decide to start your business? It's a good example of the decision making process. A businessman have to make decisions under the pressure of time and circumstances. The decision making process is a key to leadership.

Duration Lesson: 2, 5 hours External readings: 3 hours Do it yourself: 5 hours

Total: 10, 5 hours

Objectives: The manager is above all, the man who decides. The decision making process will show you:

-How to manage reactive decisions. -How to manage proactive decisions. Finally, you will have a toolbox for improving your decision making process. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

1-TYPE OF DECISIONS Facing a situation, you have to decide. For example, you are surrounded by the fire: What do you do? To jump through the windows and risk to kill yourself or to wait the firemen and risk to be burned to death if they come too late? In this case, the choice to not act and to wait the firemen is also a decision by itself. Unfortunately, many people are unable to decide: One day, they opt for a solution and the next morning they opt for another. Indecisiveness plays a great role in the history of many events.

Real life example: The last famous example of indecisiveness is the shameful affair of Srebenica in former Yugoslavia: The representative of the UN and the general who commanded the UN forces had been unable to make up their mind about the need for an air force support. As a result of this indecisiveness, 7000 people were badly slaughtered. It's not sufficient to be able to decide. You must take the good decision! Taking a good decision is the crucial state because there is always a lot of uncertainty about the future and about the action that other people can take. All the decision making process aims to reduce this uncertainty. Firstly, we shall distinguish different types of decisions: daily and global decisions and then reactive and proactive decisions.

11-Daily and global problems

Very often the uncertainty can be managed thanks to knowledge and training. When you drive a car you take ten decisions per minute and you make them automatically because you have been trained. In the same way, many business decisions just require knowledge and training. For example, problems such as “What to do if my sales fall? “What to do if I register a loss?" "Do I must invest in this machine?" find their answers in the knowledge. Regarding these daily matters, our program brings a lot of tools and best practices to learn and to apply. It means that we only deal here with the global decisions such as: "Do I start a business: yes or no?" "Do I partner with John?" "Do I merge with this company? Do I sell my business?" and so on. These global decisions are the most important and unfortunately You will not find their answers in a book. However, You can improve your decision making process: For this purpose, we shall provide you with sound advices and advanced tools.

12-Reactive and proactive decisions Dealing with the decision making process, scholars and biz books recommend to adopt the following process: First, define the problem, Collect information, develop options, choose the best option, plan, execute, and follow up and so on. Now, try to imagine the two following situations: You head a travel agency and you make tourists traveling in mountains. Suddenly one of your employees arrives in hurry and announces you that your bus with five tourists has collided another car. People are expected to be dead or heavily wounded. What will you do? Do you intend to define the problem and to study the options with your computer? Just imagine another example: you head a food catering company which provides schools with meals. A TV journalist announces that three children have been transported to the Hospital and that the cause seems to be a food poisoning. He calls you for a hot interview: What will you say, what will you do? I mean that books describe only how to deal with proactive decisions such as to start a biz, to partner or to merge. These decisions allow time for studying the options. On the contrary, the reactive decisions that you have to take facing a disaster do not allow any time. You have to act under the pressure of time and circumstances and of course such decisions are both the most important and difficult. Does it mean that there are no solutions? In fact, the method to deal with such situations exists and we shall learn it to you. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

2-REACTIVE DECISION Reactive decision must be carefully prepared in order to act quite automatically when the event occurs. A bad event with either a high or either a low probability is a risk. The first step is to carefully study the risks which could strike your business.

21-Risk assessment matrix We shall use again our risk assessment matrix. You had yet drawn up a first assessment matrix in FW 11, but this new analysis enables you to update the matrix.

211-Type of risk: Each business is exposed to specific risks connected with its main activity. For example, Banks, currency traders and jeweler' are currently exposed to hold up. It's not only a matter of insurance. It's a matter of life or death according how you react. Business connected to chemicals, foods and drugs are currently exposed to poisoning risks, ecological threats and food diseases. Travel agencies can be exposed to terrorism in some countries. All biz are exposed to labor accidents, fire, earthquake, volcanic eruption, fraud and so on. In some countries, you must take in account civil wars, revolution and riots in urban areas. You can be confronted with less dramatic events that can nevertheless be catastrophic for your specific biz: For example, what happens if your unique supplier suddenly defects? What happens if your internet system is completely pirated and destroyed? What happens if airlines go to strike when you have a lot of tourist blocked in some exotic countries? All these events can never be planned. It is quite impossible to identify or to predict their chances: They occur suddenly and you have to decide suddenly too.

212-List your risks: In any preparation, the first step is to list your risks and their probability. To simplify, just identify high probability and low probability. For example, with growing insecurity, a criminal attack must be graded as a high possibility for any biz involved in money business or gem trade. On the contrary, a travel agency has a low probability to be confronted with a hold up. The second task is to estimate the impact of the event. You can distinguish the accident, the disaster and the catastrophe. With an accident, your biz will go on as usual. A disaster implies a long recovery and a catastrophe means that your business is terminated.

The notation only depends on the impact on your own business: For example if you head a bank, a earthquake is less harmful than a simple hold up: In general, banks have heavy walls and should not suffer to much from the effects of an earthquake! According to the biz, the same event can be an accident or a catastrophe. For example if your tourist guide is poisoned with the food, it's for you an accident but for the food catering it could be a catastrophe because many people have certainly be poisoned too. You have also to take in account insurances. For example, a fire which is a very stressing event should have in general a low impact because most of the biz are insured against the fire.

213-Establish your risk assessment matrix: When you have finished this analyze, you draw up your risk assessment matrix. Look at the next drawing.

As you can see, it's an easy to use tool. You write in each square the risks you have listed according to their probabilities and their impacts. Whatever their low or high probabilities, all the risks that are fully insured could be put in the left part of the drawing: low impact. However, you have to analyze: For example a burglary by night has a low impact because insurance should pay. On the contrary, a hold up causing the death of customers and employees has a

high impact: Of course insurance will pay but you will nevertheless suffer of a moral prejudice and a bad impact for your image. Then you have to prepare yourself for taking decision.

22-Automatic decision process Of course, you can never prevent these events to occur because zero risk never exists. Nevertheless, you can reduce the probability of the risks. -Firstly, adopt and implement some preventive measures: Reinforce the defenses of the bank. Have a good driver and maintenance for your tourist bus. Have good anti virus for your internet site and so on. It does not prevent the risk but just reduce its probability. -Secondly, according to your risk assessment matrix, establish the best emergency plans. -Thirdly, you must be aware that once the event occurs, most people are in panic. In this case, the best plan becomes ineffective because people are emotionally unable to apply it. It means that you have to prepare for a chain of automatic decisions that everybody can follow up without having to think. These prepared decision and automatic procedures will enable you to act like an automat. Everything will be easier and you will face a crisis with no more stress than when you are driving in a traffic jam!

Real life experience Years ago, being in governance circles, I had have the opportunity to deal with automated and prepared decisions. In case of national emergency, I had just to open a file and to apply a list of prepared decisions: call X, call Y, call the airport, send this message to Z with the following code and so on. Everybody along the chain of command knew what he had to do when he received the message. Nobody commented or asked questions. It was really a fully automated procedure. For example, an automated procedure should be required in our first tourist example. The worst appears when you do not know exactly the nature and the spread of the event. For example, an animal is contaminated, is all the herd contaminated too? In this case the principle of cautiousness should command to launch the emergency procedure. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

3-PROACTIVE DECISION

Fortunately, proactive decisions are more frequent than reactive decisions. We recall you that daily business decisions and solutions rely on well known tools that you will learn in the further modules. Once again, I precise that we are only dealing with global decisions. The decision making progress implies a phase of preparation and a phase of execution.

31-Preparation: Preparation is a must. You know the event:("Do I start a business or not") but you do not know the consequences: Is it a good decision? What are the probabilities to do well or inversely to be impoverished?

311-Define the problem: In any problem, you have to establish the causes and the symptoms. Knowing the causes, you can recommend a solution just as a doctor does. Unfortunately, most often there are different possible solutions such as A, B, and C. What is more you do not know the chances of success of A, B, or C!

312-Collect information's: One way for reducing uncertainty is to collect information's. For example: Will you partner with company A? This company can be good, medium or bad. For reducing this uncertainty, you can collect information's from your bank or other sources. Unfortunately, sensible information's are not on the market place and require to enter in the domain of intelligence.

Down earth advice It means that you have interest to make friends with people who have specific information's. Once you have started your business, pay a courtesy call to the local police officer, or the local attorney. Focus on people who are likeable and who talk easily. You can collect from them some sensible information's. Invite for having lunch the local journalists. These people like to talk! Thanks for information and intelligence, you can reduce uncertainty. It means for example that among three consequences of your decision, one should appear more probable. For example, company A is not a good company.

313-Assess the consequences of each option You must also intensively investigate all the consequences of your decision: Let's suppose that your decision could have three outcomes: one very good (A), one good

(B) and one bad (C) with equal probabilities. In this case, your decision should have 66% of chance to be a good decision. Now examine more carefully the possible consequences: With A, you win 100, with B you win 30 and with C you get a death penalty! In this case the consequences of C are out of proportion with the benefit that you can expect. It's why most criminal activities are risked!

Real life example Since chernobyl, we can assume that implementation of nuclear power plants near big towns correspond to bad decisions because an accident, whatever its low probability, should result in disproportionate losses compared with the expected advantages.

314-Define your options and the best alternative Be careful about the idea to multiply the options. It could be a poor excuse for never taking any decisions. Too much options kill the decisions and risk to induce an infinite process of brainstorming.

Down earth advice: When people are entering in an unlimited thinking process in order to delay the decision, apply Andy Warhol's maxim: Do not think-Act now Business books always recommend to have a best alternative. It means that you must have a contingency plan if the decision gives bad results. Regarding your contingency plan, keep it secret! The best way to motivate people is to say them that there is none contingency plan: Remember the odyssey when Achilles burns his vessels. He means to his troops that there is none contingency plan and that the only issue is to win or die! Finally, you can also temporize when a decision is not mature. A decision has not come to maturity when you do not know all the elements of the situation or when you do not understand something. Once again, it must not be an excuse for postponing any difficult solutions!

External readings: To illustrate this process in a detailed way, go to the University of Wisconsin-Madison: www.ies.wisc.edu. Click on "Search our web server" then write "econaes" in the window and submit it. Then click on "WRM2000Decision making process". You will find a fascinating lesson about the decision to repair or to remove a dam. I know that you do not intend to built dam or power plant but this site gives a pleasant and extensive description of the decision making process and notably its preparation phase.

32-Execution: Quantitative analysis, decision tree, grid analysis. Once your preparations are finished, you have to decide. We shall provide you with different tools that can help you to make the better choice. These tools are linked to the quantitative analysis and the probability laws. Do not be afraid. You do not need to be an expert in mathematics or statistics. We shall make it easy in following a very simple case and what is more your own case: The decision to start or not to start your biz.

321-Case study: Quantitative analysis To start a biz is a decision. To not start is another decision. Indecisiveness should be one day to decide to start and one another day to decide to do not. We just examine how to make a choice between the two decisions. After analysis, you have gone to the conclusion that each of these two decisions could have three consequences. If you start a biz (decision A) you could get big money that is to say 500, you could also get little money: 100 and you could also impoverish yourself: -200 If you decide to do not start there are also three consequences: You keep your actual salary: 100, you improve your salary with time: 200. You lose your job and find another job paid only 50. We can sum up these elements in the following table -----------------------START A BIZ----------- NOT START Best event -----------------500----------------- 200 Medium event---------------100----------------- 100 Worst event--------------- -200------------------50 How will you decide: First situation: you have not any idea about the relative chances of each event. It means that you are confronted with a pure uncertainty and in this case the chance of each event is about one third that is to say 33%. That is that we call a flat probability as shown by the following drawing:

In this case, in each rank, you multiply each expected value by 33% and you sum up the results: START: (500*33%) + (100*33%) + (-200*33%) = 165+33-66= 132 NO START :( 200*33%) + (100*33%) + (50*33%) = 115,5 You have to choose START because the expected value is higher than NO START. Second situation: Now let's suppose that you can make reasonable assumptions about your career: For example, you think to have 50% chance to improve your salary and 25% for the two other events. In this case, the line NO START should become: (200*50%) + (100*25%) + (50*25%) =137,5 In this case, NO START should be a better decision. It means that when you make a preparation and collect information's you can reduce the uncertainty and reach a probability which is illustrated by the following drawing.

One event has a better probability to appears that the others Third situation: Now you will assume that thanks to deep preparation, you can better assess the probability of START. For example, as you have intensively learn how to start a biz you, you can expect a probability of 60% for the best event, 30% for the medium and 10% for the worst. Moreover, you realize that you are employed in a public service. By lack of relations, your chances to improve are very weak, maybe 10%. Inversely, your chances to lose your situation are quite nil's, may be 2%. It means that your medium has a probability of 88%. It is called a deterministic probability. The following drawing illustrates these new situations:

Now we shall make the calculations: START :( 500*60%) + (100*30%) + (-200*10%) =310 NO START: (100*88%) + (200*10%) + (50*2%) =110 The decision is easy. Start is the best decision. No matter the real subject, the interest of this method is too show you that a good preparation enables to reduce the uncertainty and to improve and facilitate the decision process. You can object that all is based on the figures used to show the expected incomes: (500, -200, 100; why not 1000, 300 or -500?) and on the figures of probability: why 50%? Why not 90%? The expected incomes are based on your own market study and your own calculations regarding your profitability. According to different hypothesis of sales, you can effectively get different pictures. All studies make sensibility tests in order to estimate the best, the medium and the wrong. I could say that there are not too much uncertainty about the expected incomes figures.

The probability of the event (30% or 60%) can be also well assessed. Of course, these probabilities must not be based on your optimistic or pessimistic mood!

Real life example I had fun in reading a famous biz book where the probabilities were based on the psychological profile of the investor: Optimistic: you write 60% for the event. Pessimistic: you only allow 40% for the event! Of course doing like that is a pure loss of time. You should have better to throw a coin and to play at heads or tails! In fact your assumption regarding the probability of any event must rely on the probability laws and not on your mood. The probability laws show that for many events, we obtain a normal distribution of probability which allows us to make sound expectations regarding the future. In this domain, the most fascinating tool is the Bell curve.

322-The bell curve Come again with our probability about your salary in a public service. For example, let's suppose that 40 years ago, 1000 individuals have entered in a company exactly the same day and with the same diploma. Then, you examine today at what hierarchical level they are arrived. Suppose that this company has only five hierarchical levels graded from the lower A to the higher E. According to this hypothesis, you are quite sure to obtain in any public service the following distribution: A: 5%, B: 15%, C: 60%, D: 15%, E: 5%. You put these results on a graph and you obtain the following curve:

This is the bell curve; it’s a fundamental statistic tool: The bell curve shows a normal distribution of the probability. It shows that in this case you have 90 % of chance to be somewhere between B and D. The Bell curve is astonishing because it describes with the same probability as above a multitude of quite different events. It's not a mystery: It's just because a large number of independent samples entering in the same situation (Here the company) always tend to a central average. It means that the same curve will describe the distribution of a student promotion according to the diploma level or the distribution of the cyclists according to their rank on the finishing line. So when I said that you had 88% to get the same salary and to remain medium it was neither a fantasy nor the fact to be pessimistic. It was just the result of the bell curve. Of course, you must not glance at this curve passively. It’s just a tool for decision. Consequently, use bell curve in your decision process and thanks to your preparation try to move yourself from the losing side of the curve to the winning side.

323-Decision trees Decision tree is a way for visualizing a complex chain of decisions. A decision leads to a new choice and therefore to a new decision that in turn faces with a new choice and so on!

Let's go on with our example and look at the next drawing which illustrates our decision tree.

Let's suppose that you decide to start a biz. This decision is not submitted to uncertainty and is represented conventionally by a square. Then you have to choose if you will follow up a training or not. If you decide to do not, you go to a circle that represents an uncertainty because it leads to three probabilities which are represented by three arrows. Conserving the same % of probability and the same expected incomes than in our first example, we know that the sum is 132. Now if you decide to take a training, you have to pay its cost that is to say -100. There is not uncertainty about the cost, so you go to a new Square. Here, according to our previous example, you meet three probabilities: 60% for the best, 30% for the medium and 10% for the worst. The result of the calculation is 310 but you have to substrate the cost of the learning (-100). The net result is therefore 210. Now, let's suppose that a consulting group proposes you to realize a complex market study costing 150. Thanks to this study, you can highly improve your probabilities: 85% for the best, 10% for the medium and only 5% for the worst: It's quite a deterministic probability!

Now look at the results. Of course, you get 425 but going back on the tree, you have to deduce the cost of the market study (-150) and the cost of the training (-100). It means that the net result amounts only 175. Despite the increase of the success probabilities, you have better in this case to not order the market study. Be aware that when there is a long chain of decisions and events you should need a computer program and a bit of time.

324-Judgment These tools are just good for preparing for a decision but they never replace a sound judgment. Firstly, monetary value must always take in account the time value: It means that $1000 expected in five years have not the same value that $1000 in cash to day. It is the same for an expected loss, but be aware than a distant threat is often more dangerous than an immediate one because its consequences are more difficult to evaluate. Secondly, you have to think about the utility of the supplementary amount of money: The utility of money varies according to the wealth. For example, suppose a man who owns $12 millions. If the expected monetary value is $2 million, he will not take heavy risks to get it. To have 14 millions instead of 12 will not modify his way of living or social position. It means that the expected money has a low utility for him. On the contrary, the supplementary money has a high utility for a poor man. A little money more, could enable him to have a home instead of sleeping rough. It could change dramatically his social position. Thirdly, the monetary criterion can conduct to unreasonable decisions: For example let's suppose that you have $1000. You invest it in gambling. If heads win you get $4000 and if it's tails you lose your bet. You have to choose between gambling or not Not gambling: you keep your $1000 Gambling: (4000*50%) + (-1000*50%) = 1500 The best statistical decision is to gamble but it may be a very unreasonable decision if you have only $1000 for ending the month. In the same way you have to look at your risk assessment matrix. Sometimes high probabilities of profits are connected with unacceptable non monetary risks.

Real life example I knew in Guyana some businessmen who were making big money with gold placers. However, they risked their life everyday in struggling with the "seringueros"(Illegal miners seeking for gold in forest).

In the same way, it seems that many world telecom leaders have taken unreasonable risks. They are now facing criminal charges for fraud. Obviously they had omitted to computerize such risks in their decision trees!

External readings Go to www.mindtools.com Click on "techniques for effective decision making" and then on "decision tree". You will find here a complex and detailed example of decision tree. Go to: ConceptDraw MINDMAP: mind map software

325-Grid analysis Most decisions in business result in money but some of them deal with non monetary issues. Let's suppose that you have to choose a location for your business either in town A or either in town B and that the two locations are equivalent regarding their monetary outcome. In this case, you fill up a matrix and you indicate the advantages (benefits) and disadvantages (costs) of each location (for example, pleasant environment, good schools, good shops and so on) Then you attribute a note from 1 to 5 or from -1 to -5 to each elements. You add the notes and you see the best result. It's quite like the "cost benefits" analysis but with notes instead of money. COST

BENEFIT

RESULTS

Decision A

-30

16

-14

Decision B

-8

37

+29

B is shown as the best solution

326-Vision Finally, if your decision is really difficult, recall your ultimate tool : Vision yourself taking the decision A and then taking the decision B. You will choose according to the pleasant or unpleasant result given by your vision. It's another way to use your intuition. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

4-FOLLOW UP Once your decision has been taken, you have to share it with your staff and maybe your suppliers and customers Be aware that in most organizations, any change is perceived as a danger. As a result, any decision could bring oppositions. The first thing you have to do is to value the strengths of your allies: people who are supporting the decisions and those of your opponents: people who are disturbed by your decision

41-Field force analysis A good tool to value these strengths and weaknesses is the field force analysis. It's just like the grid analysis: you grade with notes the opponents and the supporters. Then you establish the following drawing:

As you can see in this example, the suppliers do not like your decision. In general, they have their habits and a change disturbs their channels. Of course, the labor unions and the low staff are absolutely again any change. As the employees are opponents, the human resource manager will be too: He does not want to be in trouble because of your decision! Finally, the operation manager does not support the measure because it can modify the assembly line and he does not like it. Then, you sum up the note of the opponents and you get 14.

On the other side, the sales manager backs up your decision because it brings value to the customer. The finance manager does too because he hopes an increase in profitability. Finally, among the medium management, you only get the support of a creative and non conformist maverick! The sum of your good notes amounts 8 against 14. It's not too much but it's nevertheless the more frequent situation! Do not worried about that: knowing this analysis, you have to take measures for comforting your supporters and for persuading your opponents: communication, persuasion and finally authority are the best tools for this purpose: Try to persuade your operation manager because it's a key executive. Have benign neglect for the human resource manager. Say to the staff that the doors are fully opened and threaten the suppliers in announcing that you are going to supervise all their contracts!

Down earth advice I have read in some biz books that the field force analysis was a tool for making a decision. It's a big mistake. As people are often opposed to change, be sure that you will never make any decisions if you just follow the results of a field force analysis! The field force analysis is just a tool to follow up a decision.

42-Participation It is often said that the best way for implementing a decision and a change is to call for meetings and to implicate people in the process. Of course you have to communicate your decision but once again be aware of the fact that people do not like to change and are mostly conservative ( bell curve again!). People are always screaming that they should be consulted. In fact, they are eager to participate for deciding the vacation planning, but when a crisis occurs, you are strangely alone for bearing heavy responsibilities. Remember that a biz boss is like the captain on his boat. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

Lesson summary: You will have to take many global decisions. In all cases, preparation is a must. You have to distinguish reactive and proactive decisions.

A reactive decision is taken for managing a risk. You must establish a risk assessment matrix based on the probability and the impact of each event for your own business. Then, you have to define an emergency procedure: It is a list of prepared decisions that you will execute once the event occurs. This emergency procedure enables you to manage properly and to minimize the expected impact. Proactive decisions allow time and studies. They follow a decision making process including a detailed preparation based on information, intelligence, evaluation of options and consequences, best alternatives. The execution can use the quantitative analysis and notably the bell curve and the decision trees. Non monetary decisions can use grid analysis. Judgment and vision are always required. The follow up of the decision can use a

field force analysis.

Leadership is largely based on the ability to take decisions in crucial situations. 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching

DO IT YOURSELF Establish you tree analysis regarding your decision about starting a biz. Of course, take in account the fact that you are trained! 1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4. Follow up 5. Do it yourself 6. Coaching