Why we should not try to pick the best option, but instead use simple rules to eliminate the worst choices - by Verena Stingl, Joana Geraldi and Josef Oehme

Geraldi, Joana

Oehmen, Josef

Stingl, Verena

English

We like to think that for our strategy work, we will have plenty of time and resources. Armed with both, out of the 10s or 100s of options we have on the table, we will pick the best one.In this article, we will make the opposite argument. Not only do we not have much time or resources available to make decisions, we also should NOT try to pick the best option. Instead, we should use simple rules – quick and easy decision-making shortcuts – to eliminate the worst options.When we think about seizing strategic opportunities, we tend to picture brilliant one-in-a-million ideas. However, most of the decisions that truly realise strategy have only little of that entrepreneurial glamour. They tend to be questions of balancing uncertainties: Should we accept a contract of a difficult client in a desirable market? Should we partner with that organisation with unique technology but weak finances? Should we hire that manager who has a reputation of ‘turning the shop around’ but also of being somewhat of a wildcard

Online Research Database In Technology

Smart and simple strategy decisions to minimise regret

We like to think that for our strategy work, we will have plenty of time and resources. Armed with both, out of the 10s or 100s of options we have on the table, we will pick the best one. In this article, we will make the opposite argument. Not only do we not have much time or resources available to make decisions, we also should NOT try to pick the best option. Instead, we should use simple rules – quick and easy decision-making shortcuts – to eliminate the worst options

LSE Research Online

Smart and simple strategy decisions to minimise regretLSE Research Online URL for this paper: http://eprints.lse.ac.uk/105048/Version: Published VersionOnline resource:Stingl, Verena, Geraldi, Joana and Oehmen, Josef (2018) Smart and simple strategy decisions to minimise regret. LSE Business Review (19 Oct 2018). Blog Entry. lseresearchonline@lse.ac.ukhttps://eprints.lse.ac.uk/ ReuseItems deposited in LSE Research Online are protected by copyright, with all rights reserved unless indicated otherwise. They may be downloaded and/or printed for private study, or other acts as permitted by national copyright laws. The publisher or other rights holders may allow further reproduction and re-use of the full text version. This is indicated by the licence information on the LSE Research Online record for the item.Smart and simple strategy decisions to minimise regretWhy we should not try to pick the best option, but instead use simplerules to eliminate the worst choices - by Verena Stingl, Joana Geraldi andJosef OehmenWe like to think that for our strategy work, we will have plenty of time and resources. Armedwith both, out of the 10s or 100s of options we have on the table, we will pick the best one.In this article, we will make the opposite argument. Not only do we not have much time orresources available to make decisions, we also should NOT try to pick the best option.Instead,  we  should  use  simple  rules  –  quick  and  easy  decision-making  shortcuts  –  toeliminate the worst options.When we think  about  seizing strategic  opportunities,  we tend to  picture  brilliant  one-in-a-million ideas. However, most of the decisions that truly realise strategy have only little ofthat entrepreneurial glamour. They tend to be questions of balancing uncertainties: Shouldwe accept a contract of a difficult client in a desirable market? Should we partner with thatorganisation with unique technology but weak finances? Should we hire that manager whohas a reputation of ‘turning the shop around’ but also of being somewhat of a wildcard?To make things worse,  many of  our strategy decisions and implementation actions takeplace in a heavily constrained environment: the chance to seize the opportunities is usuallylimited in time and by what our competitors do. Moreover, any opportunity is fundamentallyuncertain and ambiguous – we think the market will respond favourably, but maybe it won’t.In short, picking the “best” option is practically impossible. So what now?We studied executives to figure out how they make decisions of strategic importance whenbusiness reality does not let them have the time or quality of information they want. Theshort answer is: instead of trying to maximise value, they will aim to minimise regret. In plainEnglish,  instead  of  looking  for  the  best  option,  they  make  sure  to  eliminate  the  worstones.This is not necessarily all that new. Michael Porter argued quite some time ago thatstrategy is about deciding what not to do. So, how can we do that quickly and reliably?We investigated an extreme case of this, competitive bidding for engineering contracts, andextracted some general lessons for strategy decisions. A competitive bidding process hasmany similarities with making strategic choices. There are a limited number of options, eachone  has  advantages  (say,  conquering  a  giant  market)  and  disadvantages  (say,  it’stechnically risky). And both are usually afflicted with significant uncertainty.Just like success, regret will ultimately be measured in financial terms. The bottom line ofminimising regret is to minimise your maximum possible loss. But on the way there, it cantake many forms: wasting resources on an idea that ultimately did not come to fruition;exposure to safety or reputation risks; or non-compliance or other legal risks. Regret canalso be an opportunity cost, for example watching a competitor commercialise a productidea you dismissed two years ago.When we observed the executives we studies, we found that they used three sets of criteriato eliminate options: 1. clear, 2. ambiguous, and 3. combinatory criteria. Let’s look at each ofthem individually.1. Clear knock-out criteriaClear criteria almost exclusively relate to boundaries set explicitly or implicitly in the strategyor other communications of the organisation, so having a clear strategy actually does help!They focus on aspects that have one unambiguous answer, such as: do not pursue strategicopportunities  with  unlimited  financial  liability;  or  that  are  located  in  countries  outside  ofstrategic target markets; or that do not clearly align with our technical core expertise. Whileestablishing and following these rules seems easy enough, in practice they require carefulfine-tuning in order not to sacrifice your innovation potential for an uninspired business-as-usual approach.This brings us to the second set of criteria: Dealing with strategic opportunities that areattractive and risky at the same time:2. Ambiguous knock-out criteriaMost  decisions  did  not  have  the  luxury  of  being  clear-cut  yes/no  choices  along  onedimension. Take for example the following six criteria that were shared by practically all ofthe executives involved in competitive bidding. Typically, a single “no” to any of them wouldtypically lead to the rejection of the opportunity:Is there a fair chance to beat the competition in bidding?Do we want to work with the client?Do we have time enough to develop a solid tender?Is the project in a location where we can and want to deliver?Do we have the capabilities to deliver the main share of what is required?Is the contract acceptable?All of those criteria are ambiguous – although a yes/no answer on the surface, it is obvioushow different people could come to different conclusions for each of them. For example, forone  executive,  the  chance  to  beat  the  competition  may  rely  mainly  on  the  number  ofcompetitors – for another it relates to the geographical distribution of the competition.For ambiguous criteria, it is thus significantly more complex – but also more important – toformulate clear rules within a team as to what qualifies for a “yes” and what for  a “no”answer.  What  we  discovered  as  critical  here  were  two  aspects:  First,  making  sure  weidentify and ask all the important questions; second, build a shared understanding of thevarious context factors that influence the decision.3. Combinatory knock-out criteriaFinally, several of the knock-out rules we found considered multiple, typically two or three,criteria together. These rules were used later in the process, after the opportunity field hadalready been screened by the first two types of criteria. These types of decisions requiredmore time and information, and were thus only applied later.They would for example evaluate the technical requirements of a suggested project againstthe  capabilities  of  their  available  resources,  and  figure  in  factors  such  as  resource  re-allocation or outsourcing of certain elements to external partners.Making simple rules workParaphrasing Watzlawick, we can’t not simplify our decision-making. The key is to makeconscious choices, create a shared understanding in your organisation of what are relevantcriteria and context factors, and finding your personal sweet spot of decision making speedversus decision making quality.What you can do is to help the decision-makers in your organisation figuring out the simplerules that really work to minimise regret on your strategic journey. In other words, help themsay No to the right (or rather: “strategically wrong”) things. Start by asking the following fourquestions:What are our “big regrets”? When has a strategy truly failed?What are our big strategy risks? What are the fewest risks we can consider withoutconsidering too few?What can we decide based on formal rules, and what needs discussion? What needsdata, and where do we trust our intuition?What decision rules worked for us and why? What changed and what rules are nolonger working for us?♣♣♣Notes:This is  the fourth in a series of  five articles based on research carried out  at  theengineering  systems  division  of  the  Technical  University  of  Denmark  (DTU)  andsupported by Brightline Initiative.The post  gives  the  views of  its  author(s),  not  the  position  of  the  institutions  theyrepresent, the LSE Business Review or the London School of Economics.Featured image credit: Image by 2014 Lunar Eclipse. Public domain under CC0.When you leave a comment, you’re agreeing to our Comment Policy.Verena Stingl is a PhD fellow at the Technical University of Denmark (DTU), engineeringOctober 19th, 2018 | Management, Strategy series | 0 Commentssystems  division.  Her  research  interests  concern  human  cognition  andbehaviour  in  highly  uncertain business environments,  such as project  andportfolio management.Joana  Geraldi  is  an  associate  professor  at  the  Technical  University  ofDenmark (DTU),  engineering systems division,  as well  as at  CopenhagenBusiness School (CBS), department of organisation. She studies human andorganisational  behaviour  in  projects  and  develop  behaviour-centricorganisational contexts for projects.Josef  Oehmen  is  an  associate  professor  at  the  Technical  University  ofDenmark (DTU), engineering systems division. His research interests focuson managing large-scale (systems) engineering programs, particularly on theapplication  of  risk  management,  lean  management  and  the  associatedorganisational strategy processes.

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Smart and simple strategy decisions to minimise regret

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