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The East African : November 18th 2013
44 The EastAfrican BUSINESS NOVEMBER 16-22,2013 MANAG E R Fo≥ successful business decisions, sta≥t with the ≥ight suppo≥t tools decision-making. But it is possible for executives to significantly improve their chances of success by making one straightforward change: expanding their tool kit of decision-support tools and understanding which tools work best for which decisions. As you ponder which tools are S appropriate for a given context, you need to ask yourself two fundamental questions: Do I know what it will take to succeed? You need to know whether you have a causal model — a strong understanding of what critical success factors and economic conditions, in what combination, will lead to a successful outcome. Can I predict the range of pos- sible outcomes? Choosing the right tools: Some contexts The answers to the questions above will point you to the best decision-support tools. Let’s look at scenarios that executives at McDonald’s might face. Situation 1: You understand your causal model and can predict the outcome of your decision with reasonable certainty. Suppose McDonald’s executives must decide where to locate new US restaurants. First, the company knows the variables that matter for success. Second, it has or can obtain rich data sources on those variables. And third, it has well-calibrated restaurant revenue and cost models. Together that information constitutes a causal model. Decision-makers can feed the variables into standard discounted cash flow models to accurately predict how the proposed location will perform and make a clear go/no-go decision. COMMENTARY H. COURTNEY, D.LOVALLO AND CARMINA CLARKE “What can you start doing tomorrow to become a better business decision-maker?” Situation 2: You understand your causal model and can predict a range of possible outcomes, along with probabilities for those outcomes. Imagine now that the McDonald’s managers are deciding whether to introduce a new sandwich in the US. They can predict a range of possible outcomes by using quantitative multiple scenario tools. Managers could then use standard decision-analysis techniques to make its final determination. Situation 3: You understand your causal model but cannot predict outcomes. Let’s now as- sume that McDonald’s is entering an emerging market for the first time. The company has much less information about outcomes, and predicting them using market research and statistical analysis would be difficult. In this situation, McDonald’s can use qualitative scenario analysis to get a better sense of possible outcomes. Executives should supplement the scenarios with case-based decision analysis of analogous business situations. Situation 4: You don’t understand your causal model, but you can still predict a range of outcomes. Suppose McDonald’s wants to enter a new line of business with a new business model. In this case, executives probably can’t define a full causal model or easily identify the drivers of success. Aggregating information Our decision tree has one set of tools we have not covered: information aggregation tools. The information that man- agers need in order to make strategic decisions is often dispersed and context-specific. A newer approach is to use information markets to capture the collective wisdom of informed crowds regarding key variables. We should note two limitations: They can be used only when executives are able to specify a range of possible outcomes. And using such markets may allow information to leak out that executives would prefer to keep private. Two alternatives to informa- tion markets can get around those limitations. The first is incentivised estimates: People who have access to diverse information are asked to provide estimates of a key outcome, and the person who comes closest to the actual number receives a payoff. The second is similarity-based forecasting: Individuals are asked to rate enior managers are paid to make tough decisions. It’s impossible to eliminate risk from strategic how similar a particular decision or asset is to past decisions or assets. Complicating factors We’ve presented a simplified set of examples above. In practice, all kinds of complications occur when major decisions are being made: Executives don’t know what they don’t know. Decision-makers are subject to cognitive limitations and behavioral biases. Cognitive bias creeps in. Most organisations can manage their biases if managers choose their decision-making approach in a systematic, transparent, public manner during which their judgments can be evaluated by peers. +Organisational processes get in the way. Organisations need to develop general protocols for decision-making because political and behavioural pitfalls are rife when money or power is at stake. Decision-makers tend to rely on a single tool. It’s often useful to supplement one tool with another or to combine tools. Managers don’t consider the option to delay a decision. In highly uncertain circumstances it’s wise to borrow from a different tool kit altogether: learning-based, iterative experimentation. What can you start doing tomorrow to become a better business decision-maker? Begin by developing your decisionmaking tool kit more fully. And make it a habit at your company to consciously decide how and when you are going to make any decision. Hugh Courtney is the dean and a professor of international business and strategy at Northeastern University’s D’AmoreMcKim School of Business; Dan Lovallo is a professor of business strategy at the University of Sydney and a senior adviser to McKinsey; Carmina Clarke is a senior manager at Macquarie Group. New York Times Syndicate How to o≠e≥ co≥po≥ate social ≥esponsibility the ≥ight way By NANCY KOHEN The New York Times Syndicate IN 1970 the economist and Nobel laureate Milton Friedman called corporate social responsibility “hypocritical window dressing,” saying that businesspeople inclined toward it “reveal a suicidal impulse.” How times have changed. Some executives still take a Friedmanesque view, but most accept social and civic responsibilities as indispensable to doing good business; their enterprises won’t survive if those responsibilities are ignored. Keep in mind that capitalism needs a brain and a soul. Solving today’s burning issues - social, environmental, political and financial - requires bigger goals, new incentives and a reconception of what business really is. It also requires leaders with moral muscle who are willing to pursue sustainable goodness and positive impact despite colossal challenges. Starbucks CEO Howard Schultz and Unilever CEO Paul Polman are champions in this movement: Their long-term missions and pursuits are models for building companies to last. Invest in people above all. A company’s most important assets — mission, reputation and people — are not on the balance sheet. Schultz is deeply invested not only in Starbucks’ 200,000employees but also in its global coffee bean farmers. Whether offering stock options and health coverage to parttime US workers, hosting “family partner forums” for employees’ parents in Beijing and Shanghai or donating cows to coffee If your sole goal is to maximise profit, you’re on a collision course with time.” Live the adage “from those to whom much is given, much is required.” Starbucks and Unilever may have a resource advantage, but they use their farmers in Rwanda, he sees enlightened decision-making as smart business: Health benefits and parent engagement build trust among employees; cows for coffee farmers strengthen loyalty and productivity. “To be a benevolent organisation, you have to make a lot of profit,” he told Fortune in 2011. “But if your sole goal is to maximise profit, you’re on a collision course with time.” brand, visibility and scale to blend capitalism with activism to influence change. Polman tackles global malnutrition; Schultz addresses job creation and political disunion. And people respond. Schultz and Polman represent a growing corps of 21st-century leaders who are demanding bigger, bolder things of business - not primarily as a moral obligation but as an imperative for enduring organizational success. In the next decade we’ll see others forge their own models, just as we’ll see the decline of companies that cannot summon the moral courage demanded by principled leadership. Unilever’s goal is to “stay close to society to guarantee our future.” Polman says that what he’s doing is “nothing special.” But if his and Schultz’s actions motivate others to follow, the impact will be extraordinary.
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