Decision-Making in Organizations

We know that cognitive biases affect nearly
every decision we make, and in the world of business, people need to make important choices
every day. Often these choices must be made without delay
and have broad, far-reaching consequences. How can we make sure that our choices remain
rational and objective and free from our potentially harmful cognitive biases? As it turns out, there is a system, but it’s
a lot more like a process or a habit than a magic bullet. New research has shown that the world’s
best managers can overcome biases and reliably make effective decisions by following an approach
called diligence-based strategy. Doing business in the 21st century isn’t
easy. No matter the industry, most organizations
will eventually face a crisis: maybe new competitors will appear out of nowhere or an existing
brand will try to carve a slice out of your customer base. Today’s competitive conditions are forcing
organizations to strategize and act quickly. Thus it’s easy to see why many companies
scramble to create a revolutionary new strategy to cope with crisis — conducting market research,
analyzing trends, and evolving the core business model. But this is the wrong approach. Following the traditional “big strategy”
approach leaves room for more errors in judgment, particularly during a crisis. Instead, organizations should rely on diligence-based
strategy by turning their attention to a small number of ordinary business activities — like
sourcing inputs, managing customer relationships, and developing the right people. Diligence is about focusing on the fundamentals. By optimizing their operations, organizations
can promote the conditions that allow for better, more thoughtful, long-range strategies
to emerge inductively. Developing diligence requires a different
type of thinking. The best executives attend relentlessly to
what they can control. They rely more heavily on measurement and
empirical evidence and less on opinions or persuasion. Think of baseball executive Billy Beane, who
set a famous precedent by using advanced statistical analysis, overthrowing the more traditional
methods of evaluating baseball talent. The “moneyball phenomenon” has motivated
a new surge of interest in optimization — many companies now find that big data can reliably
inform their decision-making. As an executive, your primary task is to know
the levers that drive business performance, and to pull those levers. To identify fundamental activities, ask yourself
this: does mastery of this activity contribute significantly to the performance of the company? And can the activity be reliably measured
and monitored? Companies should only have a handful of fundamental
activities — like “sourcing inputs,” “managing the supply chain,” or “serving
customers.” It is only after isolating the company’s
fundamental activities that the work of optimization can occur. Most importantly, managers should use every
available technology and data source to compile information on the company’s activities. It’s easy to go astray when decisions are
made based on emotional responses or incomplete information — which are a natural occurrence
during a competitive crisis. Diligence-based strategy allows companies
to systematically focus on what matters most: improving the fundamental operations that
lead to success. To find out more about diligence-based strategy,
decision-making in organizations, and cognitive biases, please read California Management
Review’s special issue on Behavioral Strategy, Volume 59, Issue 3.

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