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On decision making r6 oct 2010

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Priiva Consulting
www.priiva.com




On Decision Making
Achieving your optimal outcome through game theory.
By: Bill Forquer www.priiva.com/Bill.html
                 www.billforquer.com




K e ywo r ds: st ra te g y, st ra te g ic dec is io n ma k in g, ga me th eo r y, s t rat e gi c
framework
Forks in the Road
Ever been at a fork in the road? Not literally, but in a business context. Maybe you’ve
tasted a two-prong fork – buy vs. build, partner vs. acquire, offense vs. defense, litigate
vs. settle, sell-out now vs. later. Or maybe you’ve tasted from a three-pronger, such as
developing a new product independently vs. partnering vs. acquiring. More
professionally, this is usually called “strategic decision making”.

McKinsey Quarterly is always a great source for strategy topics, including strategic
decision making. "Taking the bias out..." highlights how to keep bias from creeping in to
the decision making process. "How we do it..." features decision-making strategy by
three renowned business executives. "How to test your decision-making instincts" gives
practical advice on when to use gut instinct and when to use more analysis. “The human
factor in strategic decisions” explores how managers and companies can overcome
human nature in making decisions. And not so recent, yet relevant, “Making the board
more strategic: A McKinsey Global Survey” offers great insights about board and
management interactions.

This paper builds on those topics and adds my 29 years of forks-in-the-road experience in
the enterprise software market.

Forks Make You Eat the Rest of Your Strategic Framework

Forks-in-the-road are the most defining decisions your company faces. And those forks
will test the rest of your strategic framework. Your vision. Your mission. The
aspirations that make employees arrive early and stay late. The aspirations that make
customers push harder on your behalf in a key meeting that you’ll never know even
existed, let alone be invited to. Essentially, these decisions test the “why” in your
company’s core DNA. Why do we exist? Why customers really buy our stuff? Why do
investors invest in us?

If you happen to feel complacent that your company isn’t facing any such forks, then you
should pay particular attention lest you land in this graveyard of great names. As
Nationwide Insurance commercials aptly advise, “Life Comes at You Fast”.

The Typical Decision Process (with color)

Very few executives I speak to can actually articulate a repeatable strategic decision
making process in their organization. Can you? And specifically, separate decision-
making from execution of the decision. It’s easy to remember lots of things about
executing a decision, because we spend months, quarters, and years doing that. But what
is your process for arriving at a decision before execution plans occur?




                                                                                              2
To make that easier, let’s oversimplify the fork-in-the-road into three simple stages. This
isn’t meant to be MBA textbook – just three raw stages described with color of how
things often work: Debate, Decision, and Approval.




Debate

The debate focuses on choosing the “right” strategy for your company. You argue for
Strategy A. Your colleague argues for Strategy B. You’ll both collect facts and data.
Then you’ll begin lobbying others. You’ll both debate louder. Human instincts kick-in
and debate soon morphs to turf.

Decision

Armed with the camaraderie of debating the “right” strategy, a decision gets made.
When I ask executives how decisions are made in their organization, I hear one of two
answers depending on the personality of the CEO. If the CEO is a delegator, I hear, “I
don’t know. It just happens.” Conversely, I hear “The CEO.”

Approval

Now allegedly aligned on the decision, an executive-level presentation is required to
secure approval. For fork-in-the-road decisions in a public company, that group is the
board of directors. How to get the board on-board? Some will argue for minimalism –
the board hires management to make the hard decisions. Contrarians will argue the board
requires a deep understanding to properly fulfill their fiduciary responsibility. My
experience is that management overloads the board with information, perhaps
subconsciously, to cover a poor decision making
process.

Introducing Game Theory                                         Game theory is a
                                                                branch of mathematics
Can you relate to this painful Debate-Decision-Approval         that can be applied to
process? Would you like to accurately predict the future        strategic decision
structure of your industry? Would you like to optimize          making. If you aren’t
your company’s position within that prediction? Does            familiar with game
your organization need a better decision making process         theory, here are a few
that installs confidence and alignment in colleagues and        introductions from my
the board?                                                      blog.
Yes. Yes. Yes. Yes.




                                                                                          3
Using Game Theory at the Fork in the Road

A decision process based on game theory fundamentally changes the debate from
introspective to extrospective. An extrospective view considers all stakeholders, or more
commonly “players”, in your market including your own organization, your current
competitors, your future competitors, partners, regulatory authorities, and potential
acquirers. The debate is no longer “Is our Strategy A better than Strategy B”? Rather,
it’s “what is most important to each player?". A debate about importance is far more
enlightening, less territorial, and builds working relationships rather than straining them.
Regardless of what decision is ultimately made, the entire team is far more aligned,
focused on the interactions of all the players, and the strategic opportunities those
interactions provide.

The result of this debate is a ranking, by order of importance, of all options available to
all players. That is, how much do your competitors care about the chessboard moves that
all players might make, and vice versa? This ranking is fed into a mathematics engine
that yields a set of predicted outcomes from millions of possibilities. Of those predicted
outcomes, some are more favorable for your organization than others. Once you accept
the set of predicted outcomes, all your energy immediately gravitates to making the right
moves that will lead to the best achievable outcome and guard against the worst.

Game theory analysis will also compute your relative power compared to others, predict
when players will make their big moves, periods where market change will accelerate,
periods where the market will stand-still, and reveal hidden allies or enemies.

Suddenly, you and your organization can develop a strategy based on predictable
outcomes and insights. Your best moves on competitive positioning, acquisition targets,
alliances, innovation process, product and channel blend, and exit timing will be far more
obvious. And you’ll be proud to present an eloquent strategic package to your colleagues
and board, breeding confidence throughout, and improving your success.




About:

Bill Forquer is a Principal with Priiva Consulting, a boutique strategy consulting firm 
that helps clients approaching a fork­in­the­road.  Forquer is pronounced “Forker” 
which can also be spelled as an icon “­­=er”.    Comments to this paper are encouraged 
on SlideShare, or in Bill’s blog.   

 




                                                                                           4

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On decision making r6 oct 2010

  • 1. Priiva Consulting www.priiva.com On Decision Making Achieving your optimal outcome through game theory. By: Bill Forquer www.priiva.com/Bill.html www.billforquer.com K e ywo r ds: st ra te g y, st ra te g ic dec is io n ma k in g, ga me th eo r y, s t rat e gi c framework
  • 2. Forks in the Road Ever been at a fork in the road? Not literally, but in a business context. Maybe you’ve tasted a two-prong fork – buy vs. build, partner vs. acquire, offense vs. defense, litigate vs. settle, sell-out now vs. later. Or maybe you’ve tasted from a three-pronger, such as developing a new product independently vs. partnering vs. acquiring. More professionally, this is usually called “strategic decision making”. McKinsey Quarterly is always a great source for strategy topics, including strategic decision making. "Taking the bias out..." highlights how to keep bias from creeping in to the decision making process. "How we do it..." features decision-making strategy by three renowned business executives. "How to test your decision-making instincts" gives practical advice on when to use gut instinct and when to use more analysis. “The human factor in strategic decisions” explores how managers and companies can overcome human nature in making decisions. And not so recent, yet relevant, “Making the board more strategic: A McKinsey Global Survey” offers great insights about board and management interactions. This paper builds on those topics and adds my 29 years of forks-in-the-road experience in the enterprise software market. Forks Make You Eat the Rest of Your Strategic Framework Forks-in-the-road are the most defining decisions your company faces. And those forks will test the rest of your strategic framework. Your vision. Your mission. The aspirations that make employees arrive early and stay late. The aspirations that make customers push harder on your behalf in a key meeting that you’ll never know even existed, let alone be invited to. Essentially, these decisions test the “why” in your company’s core DNA. Why do we exist? Why customers really buy our stuff? Why do investors invest in us? If you happen to feel complacent that your company isn’t facing any such forks, then you should pay particular attention lest you land in this graveyard of great names. As Nationwide Insurance commercials aptly advise, “Life Comes at You Fast”. The Typical Decision Process (with color) Very few executives I speak to can actually articulate a repeatable strategic decision making process in their organization. Can you? And specifically, separate decision- making from execution of the decision. It’s easy to remember lots of things about executing a decision, because we spend months, quarters, and years doing that. But what is your process for arriving at a decision before execution plans occur? 2
  • 3. To make that easier, let’s oversimplify the fork-in-the-road into three simple stages. This isn’t meant to be MBA textbook – just three raw stages described with color of how things often work: Debate, Decision, and Approval. Debate The debate focuses on choosing the “right” strategy for your company. You argue for Strategy A. Your colleague argues for Strategy B. You’ll both collect facts and data. Then you’ll begin lobbying others. You’ll both debate louder. Human instincts kick-in and debate soon morphs to turf. Decision Armed with the camaraderie of debating the “right” strategy, a decision gets made. When I ask executives how decisions are made in their organization, I hear one of two answers depending on the personality of the CEO. If the CEO is a delegator, I hear, “I don’t know. It just happens.” Conversely, I hear “The CEO.” Approval Now allegedly aligned on the decision, an executive-level presentation is required to secure approval. For fork-in-the-road decisions in a public company, that group is the board of directors. How to get the board on-board? Some will argue for minimalism – the board hires management to make the hard decisions. Contrarians will argue the board requires a deep understanding to properly fulfill their fiduciary responsibility. My experience is that management overloads the board with information, perhaps subconsciously, to cover a poor decision making process. Introducing Game Theory Game theory is a branch of mathematics Can you relate to this painful Debate-Decision-Approval that can be applied to process? Would you like to accurately predict the future strategic decision structure of your industry? Would you like to optimize making. If you aren’t your company’s position within that prediction? Does familiar with game your organization need a better decision making process theory, here are a few that installs confidence and alignment in colleagues and introductions from my the board? blog. Yes. Yes. Yes. Yes. 3
  • 4. Using Game Theory at the Fork in the Road A decision process based on game theory fundamentally changes the debate from introspective to extrospective. An extrospective view considers all stakeholders, or more commonly “players”, in your market including your own organization, your current competitors, your future competitors, partners, regulatory authorities, and potential acquirers. The debate is no longer “Is our Strategy A better than Strategy B”? Rather, it’s “what is most important to each player?". A debate about importance is far more enlightening, less territorial, and builds working relationships rather than straining them. Regardless of what decision is ultimately made, the entire team is far more aligned, focused on the interactions of all the players, and the strategic opportunities those interactions provide. The result of this debate is a ranking, by order of importance, of all options available to all players. That is, how much do your competitors care about the chessboard moves that all players might make, and vice versa? This ranking is fed into a mathematics engine that yields a set of predicted outcomes from millions of possibilities. Of those predicted outcomes, some are more favorable for your organization than others. Once you accept the set of predicted outcomes, all your energy immediately gravitates to making the right moves that will lead to the best achievable outcome and guard against the worst. Game theory analysis will also compute your relative power compared to others, predict when players will make their big moves, periods where market change will accelerate, periods where the market will stand-still, and reveal hidden allies or enemies. Suddenly, you and your organization can develop a strategy based on predictable outcomes and insights. Your best moves on competitive positioning, acquisition targets, alliances, innovation process, product and channel blend, and exit timing will be far more obvious. And you’ll be proud to present an eloquent strategic package to your colleagues and board, breeding confidence throughout, and improving your success. About: Bill Forquer is a Principal with Priiva Consulting, a boutique strategy consulting firm  that helps clients approaching a fork­in­the­road.  Forquer is pronounced “Forker”  which can also be spelled as an icon “­­=er”.    Comments to this paper are encouraged  on SlideShare, or in Bill’s blog.      4