Take the Bias Out of Strategy Decisions

Author: Freek Vermeulen

Some time ago, a London friend of mine was diagnosed with a severe medical condition that required urgent yet complex surgery. The condition is rare, but fortunately there were several specialists in both Germany and France who had each treated hundreds of cases during their careers. When it comes to specialist operations, experience is key, so my friend planned to visit each of them and then make a decision.

However, when I spoke to him again, he had decided where he was going to have the operation: in the hospital in his hometown in Spain. I was surprised; there was no specialist in that hospital. But he explained that he had flown to his home country for another opinion and that the local surgeon had made a good impression and was very pleasant. Moreover, my friend added, after the surgery he would have to stay in the hospital for two weeks—and it would be nice to do that near his family.

I was stunned. My friend is a rational guy, in charge of a large company. I have no doubt that, if he had been helping me make this decision, he would have immediately recommended that I go to a real specialist, wherever they were in the world. He would have told me that wherever I spent the two weeks in a hospital bed and whether the surgeon was a good conversationalist were both immaterial factors. But when making this important decision for himself, emotional considerations took over. And unfortunately, the initial operation was unsuccessful, and my friend had to travel abroad to see a specialist anyway.

Many of us would make the same irrational decision, with the same troubling consequences. Whether for a personal choice or a strategic business decision, emotions often overrule objectivity. After all, executives are only human too. It is precisely because strategic choices are such important ones, loaded with anxiety and uncertainty, that when faced with a major decision people start to follow their heart, rely on intuition and gut feeling, overestimate their chances of success, and let their commitment escalate.

Good leaders don’t allow their emotional bonds to cloud their judgment. Sound strategy requires objectivity. What can executives do to remain objective when it comes to strategic choices such as which businesses to enter, what to focus on and invest in, or when to pull the plug and abandon a course of action?

Idea in Brief

• The Challenge

Strategic decisions are often influenced by cognitive biases, leading to suboptimal outcomes. These biases can cloud judgment, distort perceptions, and result in decisions that do not align with the organization’s best interests.

• The Solution

By understanding how overconfidence, anchoring, and other biases affect decision-making, and implementing structured decision-making processes to reduce their influence, leaders can take steps to minimize the impact of bias. Techniques such as premortem analysis and scenario planning can help encourage objective evaluation and critical thinking.

• The Payoff

Organizations that effectively address cognitive biases in their strategic decision-making processes are more likely to see improved strategic alignment, enhanced organizational performance, and a stronger competitive position.

Make decision rules beforehand

One way to remain objective is to develop and set a clear decision rule in advance, when there is nothing concrete to decide yet. When Intel was still focused on producing memory chips, Stanford professor Robert Burgelman documented that CEO Gordon Moore had emotional trouble abandoning that product in favor of the much more profitable microprocessors—even though the chips were costing the company money—because memory chips had “made the company.” (Moore famously declared, “But that would be like Ford getting out of cars!”) Yet the change ultimately happened because Intel relied on its so-called production capacity allocation rule.

Gordon Moore and Andy Grove, well before this actual dilemma became relevant, had put together a formula—the production capacity allocation rule—to decide how to prioritize products in their manufacturing plant. When top management had emotional difficulty deciding to abandon memory chips, microprocessors were automatically receiving more production capacity anyway, because middle managers sturdily followed the rule that they had been given before. Because top management had made the decision of what sort of product should receive production priority well before it became a concrete issue, the strategic choice became detached from their emotion of the moment.

Tap into the wisdom of your crowd

A second method to depersonalize difficult decisions is to avoid leaving pivotal choices in the hands of just one or a few individuals—usually top managers—but instead to tap into the wisdom of the company’s internal crowd. When I asked Tony Cohen (the former CEO of FremantleMedia, producer of television programs such as The X Factor, American Idol, Family Feud, and The Price Is Right) how he decided what new programs to invest in, he replied, “I don’t make that decision.” He resisted making such crucial investment decisions himself; instead he designed an internal system that identified the most promising ideas by tapping into the collective opinion of his television executives across the world.

For example, every year he organized the Fremantle Market, an internal meeting in London where Fremantle executives from all over the world presented their new ideas (usually in the form of a trial episode). Subsequently, an internal licensing system ensured that prototype programs that many of the executives liked automatically got funded. If an idea did not receive much support, it would not receive any investment—even if Cohen himself happened to like it. That way, the decision did not rest in the hands of any individual, no matter how senior.

The revolving-door approach

Finally, a valuable technique is to explicitly adopt an outside perspective. Regarding his debates with Moore about whether to abandon dynamic random-access memory (DRAM), Grove said, “I recall going to see Gordon and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.” Taking the perspective of an outsider—a new CEO, private equity firm, or turnaround manager—can help you see things more clearly. Research shows, for example, that people are very bad at estimating the time it will take them to complete a project (such as writing an assignment or refurbishing a house), but they are good at estimating it for someone else. Asking someone to take a third-person perspective has been shown to help objectivize a process, making their judgment more accurate and realistic.

When making important strategic decisions that are going to decide our fates and those of our organizations, it is important to avoid letting emotions and personal preferences cloud our judgment. Emotional commitment can be good, but not if it gets in the way of sound decision-making. Depersonalizing decision-making may sound cold or aloof, but it’s the best way to ensure a better outcome—for ourselves and our companies.