Sunday, 13 June 2010

Zen and the art of strategic decision making

Formal models are still rarely used in strategic decision making. In the past few decades a lot of effort has been put into the development of more and more sophisticated models and methods to capture the complexity of decisions boardrooms have to make. Many of the available techniques are well suited for these kinds of questions. Think of Monte Carlo Simulation, game theory or option valuation. When applied correctly these techniques create insight, make decisions fact based and improve the overall quality of the decision. When talking to members of the board on this subject their response many times is that formal models are too complex or not complex enough to support the decisions they need to make. Even if the models could support the members of the board, their feeling is that gathering and validating of the data and analysis with the model would take too much time and is too complex to really support them. They trust their intuition or use analogies instead. It is my experience that it is a misconception; the “way” to go is to combine intuition and formal models into the art of strategic decision making.

The value from using formal models is that they provide a systematic framework that structures the identification of business rules, the gathering of data and most importantly the discussion in the boardroom on the key value drivers of the decision. Which of those drivers can be influenced by the board and which can’t they? How do these drivers influence the decision? To give you an example, government regulations can have an enormous impact on the strategy of a company but they can’t be influenced much. Using a mathematical model can provide insight on the impact of changes of the government policies and supports the development of strategies on each of the possible outcomes. That way the board is prepared for changes and can get things into gear as soon as policies change which gives them a head start over their competitors. There are many other factors that can be treated this way, like competitors, customers or uncertainties in the economy.

The most value is created with formal models when they are build and used interactively in the boardroom. While discussing the structures, business rules and key parameters of the formal model the board members are stimulated to think and discuss about what drives their business. They will touch upon the core strategic issues and find out how much they know about them and what are the blind spots. The collective effort of building the model will stimulate the common understanding of the drivers of the decision to make. Also since all understand the structures, business rules and key parameters that will drive the model and their interaction it will build trust in the model outcomes and ease communication and implementation of the strategic choices later on.

So using formal models is heaven? That would be too easy. Models are not and should not be the deciding factor when making strategic decisions. I have learned some important lessons from using models in boardrooms. One of them is to start managing expectations on the value of using a formal model from day one. One such experience is that the formal model is treated as some kind of black box supplying flawless predictions about the future. Using formal models will not solve the uncertainty involved in boardroom decision making. Making the boardroom members aware of that is an important first step. One other much encountered expectation is that the model is some kind of Delphi oracle, using it will provide all the answers, and this is of course also not true (unfortunately). Even worse perhaps is when the board falls in love with the model and uses it to prove the convictions of the board. Than the model is “tortured” until it provides the answer the board is after.

Strategic decision making requires, like Prisig in his well known book Zen and the Art of Motorcycle Maintenance explains, combining the rational and the irrational. It requires the creativity, intuition and analogies from the board members. With Operations Research the thinking process is structured, rationalizing the decision making process. So, formal modelling and Intuition must coexist in strategic decision making, increasing the overall quality of the decision.