Tag: Business

How come managers take different decisions for their organization than for themselves?

This post continues the previous post on “A decision is required – a management story with a lesson.

Prof. Herbert Simon, the Noble prize winner, claimed that people are NOT OPTIMIZERS – they do not search for the ultimate optimal choice. Simon called the way people, like you and me, make decisions “satisficers” – looking for a satisfying choice by placing certain criteria and choosing the first one that satisfy all the criteria. This is quite similar to what we call in TOC “good-enough solution.”

My point is that while people are satisficers, once they make decisions on behalf of their organization they are forced to demonstrate that they actively look for the optimal decision. However, there is too much complexity and too much uncertainty on top of it to truly reach optimum decisions. This situation makes the search for optimal decisions, based on “books” written by other academics than Prof. Simon, looks pathetic. Too many of those decisions are wrong and leading to inferior results.

A common cause for this different behaviour is:

Managers are afraid from after-the-fact criticism, which they consider unfair, because it does not consider the conditions when the decision has been made.

Hands pointing towards businessman holding head in hands concept

The key frightening aspect is the possible impact of uncertainty. After-the-fact the decision can be easily seen either as “right” or “wrong”. Admitting to have made a mistake causes two different undesired effects:

  1. Being punished because of the “mistake”, like being fired or just not being promoted.
  2. Losing the feeling of creating value and being appreciated. This is of very significant meaning to executives and highly professional people.

The fear of unjust criticism forces managers to look for two means of protections:

  1. Being super conservative.
  2. Following the “book” when there is a book.

As Mr. Preston Sumner, in his very interesting comment to the story has noted, some CEOs are influenced to do the exact opposite: take larger risks than what they would allow for themselves. This tendency is initiated by the way some large organizations compensate the c-level executives. When a CEO is pushed to show great results by hefty bonuses, while the opposite is not true, the derived greed pushes them to take high risks. Is this really what the stockholders want?

There is critical mistake in looking to “motivate” a person, a CEO or even just a regular salesperson, by linking the actual financial results to payments to the person. Money is always a necessary condition – but it is far from being sufficient to ensure good intentions to look for the interests of the organization.

Dr. Goldratt said that organizations force certainty on uncertain situation. Ignoring uncertainty make people believe that they can judge any decision according to its actual result. If we recognize the need to live with significant uncertainty we need to learn how to judge decisions in a way that would reasonably assess what might happen – the potential damage as well as the potential gain.

This is just the beginning. I claim that failing to openly and visibly dealing with uncertainty is the core problem of most organizations! I’ll certainly come back to this topic highlighting more undesired effects resulting from the core problem.

Advertisement

A decision is required – a management story with a lesson

Imagine that by a strange incident the following notes have been found. They express the hidden thoughts of a CEO that he’d never dare to reveal in public.

Man jumping over precipice between two rocky mountains at sun li

I bet everyone believes I’m in deep thoughts about the Fedora Russia Contract. Dale is still talking about the potential threat if Fedora would use its relationships with us to copy our technology and design to sell imitated products throughout Asia. Dale speaks with a lot of self-conviction, which should cause Martha and Gideon to have second thoughts about the contract they are passionately promoting. Dale brings a real example where something similar has happened: collaboration between British and Chinese companies ended badly for the British and great for the Chinese – a typical win-lose.

I think about my little daughter. Well, she is not exactly “little”, we have celebrated her 22nd birthday last week, together with her graduation with distinction from Stanford. She is my youngest child and she is determined to take an eye operation, using laser, to get rid of her glasses after failing to get used to contact lenses.

Martha is trying to argue that the probability of Fedora doing something outrageous against us is low. The main current markets of Fedora are all in Western Europe. She further claims that the Russian oligarch Ilia Mushkin, the owner of Fedora, recognizes the potential in collaborating with us exactly because he prefers doing business in Europe rather than in Asia. Dale says that this policy can easily evaporate in one day. Technically he is right. It is possible, but highly unlikely. Fedora certainly realizes that as long as they continue to export to Europe we have enough legal options that could hurt them. What Dale does stress is that if the worst scenario materializes then the damage would be huge. We have invested $15M in opening our export channel to India, Malaysia and Indonesia. However, even if all the investment would be lost, which in itself is unlikely, the corporation will still be able to sustain the loss. And the business potential of the collaboration is much higher – for us as well as for Fedora.

The situation with my daughter is different. The damage of a failed eye operation is very high and would reduce her overall quality of life. I try not to think about it – but refraining from thinking about potential consequences does not solve any problem. On the other hand, a successful operation would improve her quality of life and the probability of success is very high. Actually she tells me the eye surgeon has, so far, one hundred percent success rate. That does not reduce my fear of the “black swan”. I don’t know how to consider such a critical decision when I have no idea what is the probability of such a failure. Actually I have no real say in the matter. My daughter is an adult and she does not ask my advice – she simply tells me what she is going to do.

I notice that Dale and Martha are looking at me, expecting me to make the decision. Gideon seems to be in deep thoughts. He probably thinks about the personal impact on him if the Fedora Contract is cancelled. The last project he was deeply involved with had been cancelled as well.

Is the decision regarding Fedora truly straightforward? It has big potential along a certain not-too-large risk of real flop, and even then it is not a real disaster, unlike what might happen to my daughter. The only other consideration is that if the Russian Project, as the directors in the board call it, would fail then all the fingers would point to me. I think some more caution is required here.

“Let’s see what Claire could add to the contract that will protect us from hostile moves by Fedora.” I say. Claire is our legal adviser. I can see the light in the eyes of Martha fades out. Gideon continues to look down. I’m not sure what Dale real position is. Everybody is aware that I have just killed the Russian Project.

I would love to hear your opinion and have a discussion about the following 3 questions:

1.

2.

3.

Is there a generic inherent problem in making decisions on behalf of an organization that is expressed in the story? If so, what can we do about it?