Cognitive biases affect every decision we make. In the world of business people need to make important choices every day. These choices must be made without delay and have broad consequences. How can we make sure that our choices remain rational and objective and free from our potential cognitive biases?
As it turns out, there is a system but it’s a lot more a process or a habit. New research has shown that the world’s managers can overcome biases and easily 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 the crisis because new competitors will appear out of nowhere. Today’s competitive conditions are forcing organizations to strategize and act quickly. Thus, it’s easy to see why many companies want to create a new strategy to cope with the crisis. Conducting market research, analyzing trends, evolving the model. But this is a wrong approach.
Instead, organizations should rely on the 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 fundamentals. By optimizing their operations, organizations can promote the conditions and set up more thoughtful and 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, an empirical evidence and less on opinions or persuasion.
As an executive, your primary task is to know the things that drive business performance, to identify the fundamental activities. Ask yourself this: Does mastering these activities 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. The diligence-based strategy allows companies to systematically focus on what matters most. Improving the fundamental operations leads to success.
6 Useful Tips on Effective Decision Making
In today’s world of business, decisions should be made quickly. If you have no methodology for decision making in your organization, you will definitely fail. Therefore, we have collected a set of tips from a contributor to Forbes, Mike Myatt, to help you understand the essentials of business decision making.
Tip 1 – Analyze the situation
Firstly, one needs to understand one’s environment or decision-making context. Successful
approaches include a deliberate classification of people, situations or organizational processes into existing frameworks. Analyzing a current situation is a starting point for an effective decision-making process. On this stage, you should ask yourself the following questions:
- Why do I need to make a decision?
- What are the effects if no decision is made?
- What information driving your decision making do you have?
- What research or analysis should be done?
The detailed answers will help you figure out what data you already have and what is else needed to define the objectives of decision making.
Tip 2 – Negotiate your decision options with other stakeholders
Although persuasion should not influence your decision, it’s better to subject your thoughts to group scrutiny. Explain to your colleagues what data influence your opinion and what evidence can back up your further decision.
Tip 3 – Conduct a cost-benefit analysis (CBA)
The CBA analysis helps executives identify and compare the strengths and weaknesses of the alternatives (costs and revenues). Here’s how you can conduct a CDA analysis:
- Determine costs
- Calculate benefits
- Compare alternatives
- Report and plan action
Based on the analysis, make a recommendation and plan actions.
Tip 4 – Estimate a risk-reward ratio
A risk-reward ratio is a measurement of your potential risks and rewards. Identify all the possible rewards and contrast those all the potential risks.
Tip 5 – Think if your decision is right
There obviously should be some logic before your decision. You must clearly know what stands behind your opinion.
Tip 6 – Make the final decision
Make the best decision possible with the information at hand using some of the diligence-based methodology mentioned above. The overall process of decision making depends on many factors, such as the complexity of the problem, the time pressure, and the environment. Rely on the data, research, and fundamental processes in your organization.