A Structured Approach towards Taking Better Decisions

by Sidharth BalakrishnaFormer Board Director & Chief Strategy Officer, Essel (Zee) Group; Senior Strategist, Vedanta Group; Management Consultant with KPMG and Accenture

Effective decision making will be increasingly a key skill for all executives, both senior and junior, to demonstrate. You will be paid to solve problems and make decisions, and not just provide information to your seniors in the organisation- the latter being a task that search engines and Artificial Intelligence will do much better than humans.

So how can you make better decisions?

Let us consider the case of a company that wishes to decide where to locate its manufacturing plant. Where should this be established? In India or China, Vietnam, Bangladesh or Malaysia? Or within India, in which state? Delhi, Maharashtra, Gujarat or Tamil Nadu?

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

First, identify the parameters important to the company and relevant to the decision. The parameters are not generic- they would depend on the nature of the product the company makes or the service it provides. 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 for shipping the finished product respectively
  • Supply chain efficiencies that enable quick turnarounds and ensure that stock is not held up.

In addition, tax rates are almost always 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 and their costs that are used to make steel: such as iron ore, limestone etc.
  • Logistics to move these bulky raw materials to your manufacturing location and later the finished steel products to your customers
  • Power costs (as making steel is energy-intensive).

(As an aside, where do you think India scores on these parameters? Do you feel India’s performance on 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. Focus on the top three or maximum of five parameters that drive success in your industry.

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 ask 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 you gather 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’.

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 the other.

The third step is now to collect information about these parameters. In the above simple 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 make a decision.

BUT, stop here for a moment.

Before you finalise your decision, take a look at BOTH the following:
  • The short-term benefits and consequences of your decision
  • The long-term consequences

This involves a closer study of ‘Risks’. Something that makes sense in the short term due to a ‘special set of favourable circumstances’ may not make sense in the long run.

For example, diversifying into a new sector because there are licenses or raw material sources to be had relatively cheaply or some time-bound Government scheme may NOT make sense if one takes 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 taking on 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 are short-term and long-term considerations attached to any decision. Consider both carefully before deciding.