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28 The Elements of Effective Decision Makingby Peter Drucker contained in Management, Revised Edition

How is it possible ↓

to works toward horizons ↑ ↓

that aren’t on your mental radar —

at the right point in time? ↓

↑ larger

Thinking Broad and Thinking Detailed ↑ ↓

Intelligence, Information, Thinking

▪ “Most of the mistakes in thinking are mistakes in perception.

❖ Seeing only part of the situation — broad

❖ Jumping to conclusions

❖ Misinterpretation caused by feelings” — Edward de Bono

▪ Awareness without action is useless

The MEMO they — the enemies of the future — don’t want you to SEE

«§§§»

[Practices of Good Decision Makers]

Good decision makers don’t make many decisions.

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They make decisions that make a difference.

And they know when a decision is necessary.

Then they don’t procrastinate.

Good decision makers know that the most important, and most difficult, part of decision making is not making the decision.

That’s often quite easy.

The most difficult and most important part is to make sure that the decision is about the right problem.

Few things can do as much damage as right decisions to wrong problems. ¶¶¶

Good decision makers know how to define the problem.

They ask, “What does the decision have to do to be appropriate to the problem?”

Good decision makers don’t even think about what is acceptable to whom and what compromises have to be made until they have thought through what the right decision is.

But good decision makers know that, in all likelihood, they will have to make compromises in the end.

And they know the difference between the right compromise and the wrong compromise. ¶¶¶

Good decision makers know that they haven’t finished making a decision until they build its implementation and effectiveness into it.

Until then it’s not a decision—it’s only a good idea.

They also know that a decision is a commitment to action.

And almost always it’s action to be taken by other people.

Hence, as most good decision makers have learned the hard way, the actions required must fit the capacities, the understanding, the knowledge, the values, and the language of the people who will have to do the action. ¶¶¶

Above all, good decision makers know that decision making has its own process and its own clearly defined elements and steps.

Every decision is risky: it is a commitment of present resources to an uncertain and unknown future.

Ignore a single element in the process and the decision will tumble down like a badly built wall in an earthquake.

But if the process is faithfully observed and if the necessary steps are taken, the risk will be minimized and the decision will have a good chance of turning out to be successful. ¶¶¶

Let’s get into the elements of decision making.

The Elements Of Decision MakingYou minimize risk by following seven elements of effective decision making, which are

1. Determine whether a decision is necessary.

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2. Classify the problem.

3. Define the problem.

4. Decide on what is right.

5. Get others to buy the decision.

6. Build action into the decision.

7. Test the decision against actual results.

Determine Whether A Decision Is NecessaryUnnecessary decisions not only waste time and resources, but they also threaten to make all decisions ineffectual.

When decision makers fail to distinguish between necessary and unnecessary decisions, their organization can quickly become snowed under and turn cynical about all decisions.

Even the most necessary and most important ones will soon be seen as mere busyness. ¶¶¶

And few things so damage an organization’s ability to make changes or to take effective action as a lot of unnecessary decisions.

They lead to the organization’s sitting on its hands no matter what the decision.

Therefore, it is important that you be able to distinguish between necessary and unnecessary decisions.

Surgeons provide perhaps the best example of effective decision making, as they have had to make risk-taking decisions on a daily basis for thousands of years now.

Since there is no such thing as risk-free surgery, unnecessary operations must be avoided.

The rules surgeons use to make their determinations are very old; they go back to the Father of Medicine, the Greek Hippocrates, 2,400 years ago.

The Rules Used by Surgeons to Make DecisionsRule one:

In a condition that is likely to cure itself or to stabilize itself without risk or danger or great pain to the patient, you put it on watch and check regularly.

But you don’t cut.

To do surgery in such a condition is an unnecessary decision. ¶¶¶

Rule two:

If the condition is degenerative or life threatening and there is something you can do, you do it-fast and radically.

It is a necessary decision, despite the risk. ¶¶¶

Rule three:

The condition that falls between Rule One and Rule Two is no doubt the largest single category:

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the condition that is not degenerative and not life threatening but still not self-correcting and quite serious.

This is where the surgeon has to weigh opportunity against risk.

It’s also where he or she has to make a decision.

And it is this decision that distinguishes the first-rate surgeon from the also-ran.

[The Recurring Crisis]These old rules leave out one important case where a decision has to be made:

the recurring crisis.

If a crisis happens—say a cash crunch, or an inventory buildup, or an accident in a particular location or activity—the first time it happens, one fixes it.

But if it happens again, then one finds out the cause and fixes it so that the crisis never happens again. ¶¶¶

Quite often, the solution to the crisis is so simple that everybody afterward says, ¶¶¶

“Why didn’t we think of this ourselves?” ¶¶¶

All of us, for instance, take for granted that our address is printed on our bank checks.

But actually addresses were not printed there until well after World War II.

Before the war, only a minority of Americans had bank checking accounts; and after the war, suddenly everybody had one. ¶¶¶

And then every bank had an enormous number of accounts of people with the same or very similar names.

And, pronto, these accounts got mixed up.

Banks spent loads of money; they hired large numbers of people at enormous expense to compare the account number on a check with the account number on a monthly statement.

And still, names and accounts and checks got more and more tangled up, to the understandable annoyance of depositors. ¶¶¶

And then someone had the simple but bright idea to have addresses on the checks.

And all that’s needed is to compare the address on the check with the address on the monthly statement.

And the problem disappeared almost overnight. ¶¶¶

Now let’s see how to classify the problem.

Classify The ProblemExecutives face four basic types of problems:

1. Generic events that are common within the organization and throughout the industry

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2. Generic events that are unique for the organization but uncommon throughout the industry

3. Truly unique events

4. Events that appear to be unique but are really the first appearance of a new generic problem

All but the truly unique event require a generic solution.

Generic problems can be answered with standard rules and practices.

Once the right principle has been developed, all manifestations of the same generic event can be handled by applying the standard principle.

All the executive must do is adapt the principle to the concrete circumstances of the specific problem. ¶¶¶

Unique events, however, require unique solutions and must be treated individually.

The executive cannot develop rules for unforeseen exceptional events. ¶¶¶

Truly unique events are quite rare; someone else has already solved virtually every problem an organization faces.

Thus the effective decision maker should carefully examine the problem to determine whether it is generic or truly unique.

Applying a standard rule or principle can solve most types of problem.

Define The ProblemThe next key element is defining the problem.

This has never occurred to most people.

Aren’t problems obvious? ¶¶¶

This may be the most important element in making effective decisions—and the one managers pay the least attention to.

They try to cure the symptom rather than the disease, to use a medical analogy. ¶¶¶

One can almost take it for granted that what a problem appears to be is not what it really is.

And yet—it cannot be said too often—nothing does as much damage as the right answer to the wrong problem.

A wrong answer to the right problem can, as a rule, be repaired and salvaged.

You know soon enough when events don’t follow your expectations, and then you know that it was not the right answer. ¶¶¶

But the right answer to the wrong problem, that’s very difficult to fix—if only because it’s so difficult to diagnose.

What effective decision makers have learned is to start out with the assumption that the way the problem looks, in all likelihood, is not what it really is.

And then they work until they understand the right problem. ¶¶¶

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Precisely this principle underlies the insistence of math teachers that students spend time setting up their equations correctly, because if they make mistakes in arithmetic, they can find them and correct them.

It’s very easy to find a mistake in the manipulation and to correct it if the equation is right.

But if the equation is wrong and a student does the arithmetic right, it is much more difficult to make necessary adjustments and to arrive at the right answer.

Likewise, if you correctly define the problem and you get the wrong, unexpected result, you can correct the outcome, especially if you build in feedback so that you quickly find out whether you are getting the expected result.

It is much more difficult to attain a desired result if one finds the right answer to the wrong problem and then tries to correct it by using a different alternative. ¶¶¶

How do effective decision makers determine what the right problem is?

Effective decision makers ask

▪ “What is this all about?’

▪ “What is pertinent here?”

▪ “What is key to this situation?”

Questions such as these are not new, yet they are of critical importance in defining the problem.

The problem must be considered from all angles to ensure that the right problem is being tackled.

Here is an example from practice:

The management of one of America’s largest manufacturing companies prided itself on its safety record.

The company had the lowest number of accidents per 1,000 employees of any company in its industry and one of the very lowest of any manufacturing plant in the world.

Yet its labor union constantly berated it for its horrendous accident rate, and so did the Occupational Safety and Health Administration (OSHA). ¶¶¶

The company thought this was a public-relations problem and spent large sums of money advertising its near-perfect safety record.

And yet the union attacks continued.

And every public-opinion survey showed that the American people thought the company was a truly unsafe place to work and felt that the company was callous about its workers’ safety. ¶¶¶

A good statistician would recognize this as “typical of problems caused by false aggregation.” ¶¶¶

By aggregating all accidents and showing them as accidents per 1,000 workers, they simply hid the places where there was a high accident rate.

And true enough, once the company segregated its accidents and reported them in a number of categories-places that had no accidents at all, places

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that had fewer than the average number, places that matched the average, places that had more than the average—it found, almost immediately, that there were a very small number of places, about 3 percent of all units, that had above-average accident rates.

And an even smaller number of places had very high accident rates.

And these typically were places that would not be considered to have accident dangers and had no dangerous machinery; with the result that no one in safety and accident-prevention ever paid attention to them. ¶¶¶

But they were the places the union got its complaints from, the places whose accidents got into the papers and into OSHA reports.

It took very little time and almost no money to fix them, and both union complaints and OSHA complaints disappeared.

But not until the company realized that the problem was not accidents—the problem was accident reports—and then the real problem could be tackled.

The one way to make sure that the problem is correctly defined is to check it against the observable facts.

Until the problem definition explains and encompasses all observable facts, the definition is either still incomplete or, more likely, the wrong definition. ¶¶¶

But once the problem has been correctly defined, the decision itself is usually pretty easy.

In fact, effective decision makers use very few of the very complex decision models and decision trees.

Once the problem has been specified, effective decision makers must next decide what the right decision is.

Decide On What Is RightWhen beginning to form the decision, the decision maker must start out with what is right.

Most of us, and especially those who work in an organization, tend to start out by asking questions like

▪ “What is acceptable to the boss?”

▪ “I know that the financial people won’t like that, but how I can make the decision palatable to them?”

▪ “I know that contradicts what all of us were brought up to believe. Howcan we start small and slow so as not to shock too many people?”

Every effective decision maker is different, but every one of them can make every conceivable compromise, and compromises are necessary in the end.

But there are right compromises and wrong compromises; each is captured by an old saying.

The right compromise is expressed by the proverb “Half a loaf is better than no bread at all.”

Half a loaf still quenches hunger for one day, and it still enables a person to work or a soldier to fight for one day, even though it is only half of what an adult needs for a day’s nutrition.

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The wrong compromise comes from the biblical story of the judgment of Solomon:

“Half a baby is worse than no baby at all.”

Half a baby is a corpse and not half a growing and living child. ¶¶¶

The effective decision maker thinks through—and well in advance—what compromises are still “half a loaf” and acceptable, and what compromises are “half a baby” and worse than no decision at all. ¶¶¶

The way to think through what is the right compromise is to:

1. Go back to the definition of the problem and write down the specifications for an effective decision.

2. Ask, “What does the decision have to be able to do to satisfy the definition of the problem?”

⁃ A solution that does this but not perfectly is a right compromise.

⁃ A solution that does not satisfy the problem’s definition is the wrong compromise and is likely to do harm.

⁃ Don’t compromise on “what is right” until you must.

3. Think through all the compromises so that you know what you can accept as a right compromise and what you have to fight as the wrong compromise.

⁃ But, don’t tell people the compromises ahead of time.

⁃ Tell them only what the right decision is.

⁃ That’s the rule for all negotiations.

⁃ People often accept what you were absolutely sure they would never accept, and this will surprise you often.

⁃ Secondly, as in every negotiation, there is tit-for-tat.

⁃ You make a concession; the other side makes a concession.

⁃ If you start by making the concession, you have simply lost bargaining position, and quite unnecessarily so.

⁃ Also, the people who oppose this or that part of the decision are far more likely to accept it and, indeed, even to support it if they can say, “Dick and Mary didn’t accept this, but at least they made this concession [or changed that] because we persuaded them.”

Get Others To Buy The DecisionUnless the organization has “bought” the decision, it will remain ineffectual; it will remain a good intention.

And for a decision to be effective, being bought has to be built into it from the start of the decision-making process.

If you wait until you have made the decision and then start to “sell” it, it’s unlikely to ever become effective.

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Here are two examples of effective “buy in” processes:

1. Japanese Decision-Making ProcessThis is one lesson to learn from Japanese management.

As soon as the decision-making process starts, and long before the final decision is made, Japanese management sells the decision.

Japanese decisions are not being made by “consensus”; that’s a mis-translation of the Japanese term.

The correct translation would be something like “common understanding.” ¶¶¶

Everyone who is likely to be affected by a decision—say, to go into a joint venture with a Western company or to acquire a minority stake in a potential U.S. distributor—is asked to write down how such a decision would affect his work, job, and unit.

He is expressly forbidden to have an opinion or to recommend or to object to the possible move.

But he is expected to think it through.

Top management, in turn, then knows where each of these people stands.

Then top management makes the decision from the top down. ¶¶¶

There isn’t much of “participatory management” in Japanese organizations.

But everyone who will be affected by the decision knows what it is all about—whether he likes it or not—and is prepared for it.

There is no need to sell it—it’s been sold.

2. Franklin Roosevelt’s Decision ProcessHere is an even better illustration of effective decision making.

It is how Franklin D. Roosevelt made his decisions effective. ¶¶¶

Whenever Roosevelt tackled a problem, he would ask three, sometimes four, of his cabinet members each to think through the problem and come to him individually with a recommended decision.

In this way, he first made sure that the people who would have to carry out the decision, this or that cabinet member, would have thought it through.

He also learned which of these cabinet members, and they were independent and self-confident people, would be most in tune with the decision and would therefore be most likely to put it into practice. ¶¶¶

And, finally, he got dissent.

He got three or four pretty bright and experienced people to think through the decision.

Each could be expected to come up with a different definition of the problem.

Each had his and her own ideology, his and her own prejudices, his and her own constituents, and his and her own interests.

That meant that the same problem was seen, studied, and analyzed from

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different dimensions. ¶¶¶

And then he made his decision from the top down. ¶¶¶

FDR’s method did not make for a harmonious cabinet, but FDR probably didn’t want one anyhow.

But it made for superb decisions and, above all, for highly effective ones.

For unless one has considered alternatives, one has a closed mind.

Executive decisions are not made well by acclamation.

They are made well only if they are based on the clash of conflicting views, the dialogue between different points of view, the choice between different judgments.

The first rule in decision making is that one does not make a decision unless there is disagreement. ¶¶¶

And now we come to the penultimate step—moving from decision to action.

Build Action Into The DecisionA decision is a commitment to action.

Until the right thing happens, there has been no decision.

And one thing can be taken for granted:

the people who have to take the action are rarely the people who have made the decision.

Converting a Decision to ActionNo decision has, in fact, been made until carrying it out has become somebody’s work assignment and responsibility-and with a deadline.

Until then, it’s still only a hope. ¶¶¶

And, unfortunately, far too many decisions remain just that—a hope.

Good people work for two years to develop a new policy.

It’s unveiled with great fanfare in a big meeting with overhead projectors, PowerPoint slides, spreadsheets, and what have you.

The big boss appears and blesses it.

“It has my full support,” he solemnly says.

Everybody gets a policy memorandum, which he or she duly files, in the bottom drawer.

And that’s the last we hear about it. ¶¶¶

But the effective decision doesn’t need all this drama.

Instead, it is made into action.

A decision will not become effective unless needed actions have been built into it from the start. ¶¶¶

Converting a decision into action requires answering several questions:

▪ Who has to know of this decision?

▪ What action has to be taken?

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▪ Who is to take it?

▪ What does the action have to be so that the people who have to do it can do it?

The action must be appropriate to the capacities of the people who have to carry it out.

This is especially important if people have to change their behavior, habits, or attitudes for the decision to become effective.

If this is the case, the decision maker must make sure that the measurements, standards for accomplishment, and incentives are changed as well. ¶¶¶

Let’s look at two effective decisions, one that was lost during the implementation stage and one that was implemented very successfully.

A very large company, still the world’s leader in its industry, organized a high-level team that was going to put quantitative methods into the company.

It was a wonderful team, some top-level engineers, some first-rate mathematicians, and some top-flight manufacturing people. ¶¶¶

The team’s first assignment was to rationalize production in the company’s largest division, one that made small-horsepower motors and sold a large volume of them every year.

It had been doing so for nearly sixty years and every customer, needless to say, had always wanted a slightly different design.

As a result, the division had about 8,500 model numbers, and production was in total chaos. ¶¶¶

In fact, despite the enormous volume and the very good prices the division was able to charge, the division barely broke even because the chaos in design raised manufacturing costs. ¶¶¶

The team then worked for approximately eighteen months and succeeded in getting these 8,500 possible motor specs reduced to some ninety or so production models.

The division president and his manufacturing vice president were ecstatic.

But, of course, these small motors went into any number of appliances and machines around the world.

And no customer would scrap a $100,000 machine just because the customer couldn’t get a replacement for a $1,000 motor the company wasn’t going to make any longer. ¶¶¶

The company offered all customers who had bought motors within the last fifteen years the option to reorder within the next two years the motors they had bought, after which the company would discontinue production.

In its entire sixty-year history the division had never had anything like the business it had during the next two years. ¶¶¶

But when the two years were up and those 8,500 models were discontinued, there were enough parts for every one of them in the company’s inventory for another five years of full normal production.

They had to be written off at enormous expense and loss.

The reason:

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the purchasing clerks had kept on ordering spare parts for the old models in the way they had always ordered them—they had continued to order spare parts against new incoming orders. ¶¶¶

The team thought they had taken care of that problem.

They had brought the purchasing clerks into the meetings in which they explained the decision.

Management had issued any number of policy letters.

But nobody had even thought of talking to the purchasing clerks about actions they would have to take as a result of the decision.

But at least the team learned from the fiasco.

Their next assignment in the same company was with a then-small division that made medical and analytical instruments.

These instruments required a good deal of service, and the team’s assignment was both to redesign the instruments so that they were easy to service and to work out a methodology for servicing them.

All the service people in the field were engineers. ¶¶¶

But then someone on the team said, What about the end-users?

They are the actual service people.

The company’s service people come into play only when the users themselves cannot service the product.”

And so the team went out and looked at the users:

lab assistants, maintenance supervisors, hospital nurses—not one engineer or mathematician in the lot. ¶¶¶

They got together what now would be called focus groups, and they drafted the instructions.

And suddenly, within three months, calls for the company’s service people went down by something like 60 percent, because the users could now fix most service problems.

That division is now a very big business and the world leader in its industry, despite powerful competition, including from a very large German company and an equally large Japanese company. ¶¶¶

The products of these competitors are sometimes better than those of the company and they never cost more.

Yet the customers still buy from the organization and the organization still has groups of users who write the instructions whenever a product is changed or a new product is introduced.

Test The Decision Against Actual ResultsThe results of an important decision are usually in the future, and often quite a few years in the future.

Hence monitoring and reporting have to be built in to the decision to provide continuous testing of expectations against actual events.

To this end, effective decision makers build detailed organized feedback into

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their decisions, including reports, charts, figures, and studies.

Yet, far too many decisions fail despite all of this feedback.

This is because even the best-organized formal feedback is only an abstraction; while it can provide some useful information, it cannot present the complete picture of actual events. ¶¶¶

Effective decision makers know this and follow a rule, which the military developed long ago.

The commander who makes a decision does not rely on reports to see how it is being carried out.

Instead, the commander goes out and looks for himself or herself. ¶¶¶

Failure to go out and look at actual results is the leading reason for persisting in a course of action long after it has ceased to be appropriate or even rational.

This is because without actual first-hand knowledge of results, the decision maker will become increasingly divorced from reality. ¶¶¶

Reports are only abstractions.

While they often provide useful information, it is impossible to capture the complete story in written feedback.

In summary, the effective decision maker follows seven steps to minimize the risks inherent in every decision.

These steps are

1. Determine whether a decision is necessary.

2. Classify the problem.

3. Define the problem.

4. Decide on what is right.

5. Get others to buy the decision.

6. Build action into the decision.

7. Test the decision against actual results.

Building Continuous Learning Into Executive DecisionsIn no area is it more important than in decision making to build continuous learning into the executive’s work.

And the way to do this is to feed back from results of the decision to the expectations for the decision when it was being made. ¶¶¶

Whenever an executive makes an important decision—whether on capital appropriation; or on a strategic change, an innovation, or a redesign of a product or service; or on entry into a new market; or on people—he or she puts down in writing what results are expected and when.

And then the executive, nine months or a year later, begins to feed back from the actual results to the expected ones, and keeps on doing this as long as the decision is in force.

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So in an acquisition, for example, an executive compares the actual results to the expected ones for the two to five years it takes fully to integrate an acquisition. ¶¶¶

It’s amazing how much executives learn by doing this, and how fast.

What amazes executives the most, however, is what they learn.

For example, some executives learn their greatest weakness in making important decisions is simply impatience.

They expect results to happen much faster than they do.

And as a result, they are prone to consider a decision a failure and to start fiddling with it when, in fact, it was doing fine and only needed more time.

Their lesson disciplines them to give the decision far more time than they initially think reasonable.

And their batting average in decision making improves. ¶¶¶

On the other had, one brilliant and highly successful executive, found out the opposite about himself.

He tends to be much too patient and to wait too long.

A decision is very much like a diagnosis in medicine.

And physicians have been taught since Hippocrates in Greece, 2,400 years ago, to write down what course they expect a patient’s condition to take as a result of the treatment the physician prescribes, that is, as a result of the physician’s decision.

And that, as every experienced physician will tell you, is what makes even moderately endowed doctors into competent practitioners within a few years.

It also makes even moderately endowed managers into competent decision makers.

Summary — The Elements of Effective Decision MakingDecision making is only one of the tasks of a manager.

It usually takes but a small fraction of his or her time.

But to make the important decisions is the specific managerial task.

Only a manager makes such decisions.

An effective manager makes these decisions in a systematic process with clearly defined elements and in a distinct sequence of steps.

Indeed, to be expected (by virtue of position or knowledge) to make decisions that have significant and positive impact on the entire organization, its performance, and its results characterizes the work of an effective manager. ¶¶¶

Decision making is not a mechanical job.

It is risk taking and a challenge to judgment.

The “right answer” (which usually cannot be found anyway) is not central.

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Central is understanding the problem.

Decision making is not an intellectual exercise.

It mobilizes the vision, energies, and resources of the organization for effective action.

At the end, it is an exercise in courage and responsibility.