Training the Mind to take Better Decisions

-Taken from the book, Cut to the Chase by Sidharth Balakrishna

The mind has to be trained to make decisions—this will be a key skill for executives in all companies to have going forward. Executives will gradually be paid to solve problems and take decisions, and not just provide information; the latter being a task that search engines and AI will do much better than humans.

So how can you take better decisions? I [Sidharth Balakrishna] strongly suggest that executives work on their approach while having to take any sort of decision. 

Some common decisions could be:

• Where should your company invest—in which location? India or China, Vietnam or the Philippines? Within India, where? Mumbai, Gujarat or Tamil Nadu?
• Which product does one focus on if your company has a portfolio of products?
• Which customer segment to focus on? 

To arrive at an optimal decision, I suggest the following approach:

First, identify the parameters important to the company at that time. The parameters would depend on the nature of the product the company makes or the service it provides, or the location in which it operates. Let us take an example here.

Assume your firm assembles electronics, putting together several components, and exports the finished product to several countries. What parameters are important for such a company?

Clearly, if one is assembling products comprising many components and then exporting them, there are at least two very important considerations:

• The import and export duties on the components being procured and the finished product, respectively.
• Supply chain efficiencies so that there is quick turnaround and stock is not held up.

In addition, tax rates are usually a major consideration.

Now, we can take another example. Let us suppose you are a steel producer. In this case, the important parameters would be:

• Access to raw materials used to make steel and their costs such as iron ore and limestone.
• Logistics to move these raw materials to your manufacturing location and the finished steel to your customers.
• Power costs, as making steel requires a lot of power.

(As an aside, where do you think India scores on these parameters? Do you feel these important parameters support the ‘Make in India’ initiative?)

In my experience, often disagreements, even at the level of the board of directors, are due to the fact that different people are considering different parameters. So first, get this right— identify the parameters crucial in respect of the decision that is to be made. Do not make a laundry list of parameters; however, focus on the top three or maximum of five parameters.

Being able to identify and narrow down what is crucial to your business is a key management skill. I have seen too many senior managers asking their team to collect ‘all possible information’ when a decision is being made. This is the wrong approach. Asking for ‘all possible information’ makes your team run around like headless chickens, not knowing exactly what they seek.

Further, such an approach only wastes time. Even if your team was to get a lot of rich information, it will create an issue, for all the data rarely points in the same direction. There are always some positives and some negatives that will be found, given all the data that has been gathered, and hence you may end up suffering from ‘analysis paralysis’. 

Therefore, being a good manager with good ‘decision-making skills’ entails deciding what to examine in greater detail because it is important and what is less so can be left out. This must, of course, be done in an unbiased manner. 

Second, decide the relative importance of these parameters, in a manner of speaking, you have to assign them weightages with the relative weights reflecting their relative importance. 

For example, are tax rates the most important consideration or something else? Costs of raw materials or the cost of power? 

Again, this calls for good ‘managerial skills’. Now, you are not only deciding what is important but what is more important than something else. Everything cannot be equally important. 

The third step is now to collect information about these parameters. For example, what are the import and export duties in the countries being considered as a potential location for your company’s new manufacturing location? What are the power costs and tax rates? What is the cost and distance of sources of raw material? 

This is a structured approach to decision-making. The structure avoids biases creeping into your process, demands that you consider trade-offs and identify crucial variables, thus avoiding knee-jerk reactions. 

Finally, after going through this structured approach, you are now in a position to take a decision. 

BUT, stop here for a moment. Before you finalize your decision, take a look at BOTH of the following: 

• The short-term benefits and consequences of your decision. 
• The long-term consequences. This involves a closer study of what is often clubbed together as ‘risks’. 

This also needs close scrutiny. Most importantly, something that makes sense in the short term like a ‘special set of favourable circumstances’ may not make sense in the long run. 

For example, diversifying into a new sector because there are licences or raw material sources that are relatively cheap or some time-bound government scheme may NOT make sense in respect of a long-term view. A number of Indian companies realized this to their chagrin, when their diversifications into the power sector or even telecom turned sour, and in some cases, sunk the whole group for these were capital-intensive projects requiring large debts. 

I know of one Indian promoter who started a new business because the asset required to run that business was available for acquisition at a dirt-cheap price. But the company soon realized that the cost to keep that asset going and well maintained was many more times the initial cost of the asset. 

The bottom line is that short- and long-term considerations are attached to any decision. Consider both carefully before deciding that is the final step.