VideoAnother technique is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or "next-best" ideas. This approach is useful not only to calibrate the level of a manager's risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.
Finally, the radical way of counteracting the loss aversion of managers is to take risk out of their hands by creating internal venture funds for risky but worthwhile projects or by sheltering such projects in separate organizations, such as those IBM sets up to pursue "emerging business opportunities." The advantage is that norms can change much more easily in small groups than in companies.
Fostering a culture of open debate. It is essential to realize that these tools are just tools. Their effectiveness ultimately depends on the quality of the resulting discussions, which can't be effective unless the organization has a culture of reasonably open and objective debate.
Shaping such a culture starts at the top, as one chief executive discovered. This CEO was eager to encourage debate on the strategic plans of his company's divisions but didn't want to put his direct reports under pressure by publicly challenging them himself. He therefore created a process intended to make all division heads challenge one another in open debate. These managers refrained from voicing any real dissent, however, so the result was a dull and pointless exercise. Later, they made it clear that they had seen no upside in challenging their peers, given the company's nonconfrontational culture and rigid organizational silos.
When the top team is working at cross-purposes, the whole company suffers.
Although the CEO's experiment failed, he was on the right track. A CEO in a health care company ingeniously solved a similar problem by separating proposals from the proposers. Previously, strategic options for the company's future were closely identified with their most vocal proponents, so it was hard to conduct dispassionate debates. Instead of having each executive present his or her favorite option, the CEO organized a senior-management seminar where he asked each person to advocate another's preferred strategy. Although everyone knew that the exercise was intentionally artificial, it helped foster rational debate instead of a battle of egos. More important, perhaps, it helped senior executives see the merits of other strategies and led the group to adopt a plan that synthesized aspects of several proposals.
One way to initiate a culture of constructive debate is for the CEO and the top team to reflect collectively on past decisions. A willingness to ask how they emerged — in effect, holding a conversation about conversations — shows that the company can learn from its mistakes.
Another prerequisite of good strategic decision making is the ability to "frame" conversations in order to ensure that the right questions get asked and answered. One key principle, for instance, is clearly distinguishing a discussion meant to reach a decision from one meant to align the team, to increase its commitment, or to support a project champion. This elementary but often overlooked distinction may also change the composition of the group that attends discussions intended to reach decisions.
Once it becomes clear that a meeting has been called to reach a decision, framing the discussion involves understanding the criteria for reaching it and knowing how far the range of options can be expanded, especially if the decision is important and unusual. Thus a well-framed debate includes a set of proposed criteria for making the decision and, when appropriate, an effort to demonstrate their relevance by providing examples and analogies. Some companies also set ground rules, such as the order in which participants voice their opinions or a ban on purely anecdotal arguments or on arguments that invoke a person's reputation rather than the facts.
Companies can't afford to ignore the human factor in the making of strategic decisions. They can greatly improve their chances of making good ones by becoming more aware of the way cognitive biases can mislead them, by reviewing their decision-making processes, and by establishing a culture of constructive debate.
About the Authors
Dan Lovallo is a professor at the Australian Graduate School of Management of the University of New South Wales, as well as an adviser to McKinsey; Olivier Sibony is a director in McKinsey's Paris office.
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