Sunday, January 15, 2006

Seven principles of strategic decision making

Executives are paid to make decisions. These decisions can be framed as questions such as the following:
  • How can we assure that our new market entry gains us profitable market share?
  • How can we motivate our organization to create value for our constituents?
  • How can we distinguish between competitor strategies worth following from the dead ends?
  • How can we make robust decisions that will maximize our gains even if things don’t turn out as we planned?
  • How can we keep success from going to our heads?
  • How can we adapt to changing customer needs, upstart competitors, and new technologies?
  • How can we assure that our acquisitions are profitable?

Through my consulting work and business strategy teaching, I have developed seven key principles of strategic decision making which I believe can help executives make more effective decisions, including the following:

  1. Confirmation bias filters reality --> Assess capabilities objectively before entering a new market.
  2. Incentives matter --> Understand customers’ and partners’ incentives.
  3. Shareholder value and financial performance do not move together --> Value Leadership is a more useful mission than Maximizing Shareholder Value.
  4. Expect the unexpected --> Use scenarios and uncertainty analysis.
  5. Competitor-focused strategies happen --> Exploit them by creating customer value.
  6. Success breeds failure --> Maintain a healthy paranoia.
  7. Most mergers fail --> Analyze them rigorously.


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