Chapter 2

The Cost of Intuition-Based Decision Making

The analogy is not new, but running a large organization is indeed like flying a complex airplane requiring a sophisticated operating and control system for navigation. The top leadership team at the head of the organization has a targeted destination in mind and is responsible for both charting the most appropriate course and navigating the organization along it. This destination may be broadly defined in terms of a long-term return on assets or in more specific terms, such as a desired strategic position in a product market or a successful outcome of a vital new product development project.

Along the way, the team uses a set of markers or indicators that signal whether the organization is on course to reaching its final destination or is veering off course. The purpose of these indicators is to assess whether the progress being made toward the destination is adequate or if any corrective action is warranted to navigate around unforeseen circumstances or undesirable outcomes. Therefore, the markers are selected in a way that keeping a watch of them is analogous to keeping an eye on the business and ensuring that it is progressing toward the intended goal.

Now imagine what would happen if the crew of an aircraft knew its final destination but did not know the exact course to chart. Imagine what would happen if it knew the functions of the various levers and indicators in the cockpit but not how they related to each other or to reaching the final target. Under such circumstances, the crew might sometimes make it to its destination or land in the vicinity and at other times might miss it completely. It might sometimes try out a few maneuvers to see which one works and might be able to fly the plane generally in the intended direction through trial and error. And even if it was somehow able to bring a wavering aircraft under control, it may not learn which lever or a combination of levers ultimately did the trick. Conversely, if the aircraft was veering off course, the crew might not know exactly how to navigate it back in the intended direction. Ultimately, whether the final outcome is favorable or adverse, the crew might discover little regarding exactly which combination of actions works and which ones to take if the circumstances repeated themselves or if a new set of challenging circumstances presented themselves.

While this might sound scary, many organizations today find themselves in a similar situation. Their executive leadership tends to have an approximate idea of where it wants to take the organization but often does not have a clear path laid out for getting there. Their senior management teams generally understand the strategic and tactical levers that are at their disposal but do not necessarily have a coherent idea regarding how these levers independently or jointly relate to the ultimate outcome, such as short- or long-term profitability.

This lack of a full understanding of the relationship between the choices made and the resulting outcomes tends to tie organizations to a fate that is suboptimal at best and catastrophic at worst. For example, an organization with one of the most recognizable brands in the world was experiencing some serious erosion in its brand equity in the marketplace. Senior management therefore made a push to restore the customers’ awareness of and confidence in the brand. However, this important initiative stayed completely independent of a review of customer loyalty in the marketplace. The organization had a silo structure where two independent teams managed the brand equity and the customer loyalty programs respectively. With virtually no communication between the two teams, it became impossible for the organization to recognize that bolstering its brand would be a tall order when its customers were fleeing to competition. The chief marketing officer (CMO) did not recognize the relationship between the brand and customer loyalty and did not want the customer loyalty team to touch his “important” brand initiative. The organization’s silo-based structure fostered an environment where it became impossible for top management to accept customer loyalty as potentially a key pillar of a strong brand. Unfortunately, the brand continues to see depletion in its equity even as of today.

Another way to think of such situations is to imagine a complex electric circuit where one has access to an array of switches that are somehow linked to a sequence of small bulbs and finally to a bright large bulb. Imagine that some combinations of switches light up one or more of the small bulbs and indicate how close one is to lighting the large one. But only a few combinations of switches actually light it up. Suppose that one does not have the ability to map which set of switches relate to each of the small bulbs or how the set of small bulbs relate to the final bright one. In other words, imagine what would happen if one does not have the ability to trace the pathways from the switches at one end to the bright bulb at the other. This is exactly the problem many organizations face today.

In the absence of precise information regarding the structure of relationships between the levers under their control and their ultimate corporate goals, managers tend to overly rely on their gut feelings or a set of assumptions regarding causation. They believe that certain specific paths are most likely to lead to desirable outcomes. And by way of consistency, they also believe in certain selected markers being true indicators of progress being made toward the goal along the pathway of choice. For example, we find that managers are often committed to specific pathways such as those characterized by innovation, superior product design, deeper customer relationships, leveraged capital structure, or employee retention without truly understanding whether these are indeed the best ways to reach their ultimate financial goals. And in order to be consistent with their beliefs, these managers choose markers, such as relative design superiority, customer loyalty, capital structure, or employee engagement as the appropriate measures of their success along the chosen path. This reliance on strong prior beliefs and an absence of verification tends to suppress the search for alternative strategic pathways and often results in suboptimal or even undesirable business strategies.