In 2012, JCPenney made a fateful decision. Rather than price items at higher prices and then mark them down with discounts over time, they chose to price items at discounted prices right from the start. If a lamp were initially priced at $50 but would eventually get discounted to $20, why waste everyone’s time with a waiting game? Why not just list the lamp at $20 right from the start?
The assumption was that the American public would understand that they were getting real bargains without the cat-and-mouse game of multiple discounts. They would rush to buy items immediately after they were placed on shelves.
As it turned out, JCPenney had misread their public. Buyers did not understand what they were trying to do. Consumers sat back and waited for items to be discounted, as this is how they had always interacted with the store.
The stores learned that psychology plays a central role for American buyers. People will buy products they might not usually consider so long as they feel they are saving money. Rather than give them that low price right away, stores are better served by quoting high prices and slashing them multiple times. It is an illusion, but it is one that ensures profit from the American market.
JCPenney is not alone in making an unprofitable decision. There are numerous examples of companies that have made decisions that have driven them into bankruptcy. Big or small, businesses lose billions every year because of the quality of the decisions that they make.
American buyers are not unique in this respect. A lot of businesses in the UK have suffered from poor decision-making.
At the turn of the century, the national postal service Royal Mail chose to rebrand itself and settled on the name Consignia. The public was bemused but befuddled, as the household name had become synonymous with the government, the royal family and, therefore, patriotism. The national media hated this. The business lost £1.5 million on rebranding and eventually dropped the idea, costing another £1 billion to revert to Royal Mail.
Decca records is another example of a British business making a decision they would regret. They rejected the Beatles, claiming that “groups were out.” They signed instead with EMI and went on to become Britain’s best-selling act of all time.
Why is good decision-making important?
Every day, every hour, businesses make decisions. Fortunately, many are not of much consequence. However, from time to time, business managers are called upon to make decisions that can significantly affect the profitability and even survival of the enterprise, and good decision-making must come into play.
You can learn the value of good decision-making, as well as how to make the right choices, through an executive doctorate. A DBA is a course designed for business leaders who want to make a positive impact, solve complex problems, and do in-depth analysis. As well as learning about decision-making, students cover business management and research, applied research methods, professional development, and the impact of research on businesses.
It is important to understand that while a DBA and a Ph.D. are both doctoral degrees, they are fundamentally different. A Ph.D. is focused on theoretical applications and has a purely academic approach, while an executive doctorate is all about real-world business applications.
Even as you consider enrollment in a DBA, it is important to acquaint yourself with the basics of making decisions for businesses, including the different types of decisions and when they are best used.
What are the different types of decision-making?
Business managers have different decision-making styles, and it is important to know what they are and what impact they can have on day-to-day operations as well as the future.
As the name suggests, this is when the person or people at the top make decisions without consulting those below them. It may sound dictatorial, but it happens every day.
Things often move quickly in the business world, and there is not much time to consult. A business leader must learn how to make snap decisions to enable the smooth flow of processes.
A CEO, for example, can choose to redeploy staff from one department to another for a few hours to ease a bottleneck affecting deliveries.
In such a case, consulting others would not necessarily yield the best results because the time it takes to talk to team members creates even more delays.
When a CEO makes command decisions, they must be prepared for any negative consequences that may occur down the line.
A common failure for businesses is using a collaborative approach to make decisions when a command decision is what is required. As a CEO, you must learn to realize when to take charge. Command decision-making works best when you are dealing with emergencies.
In this style of decision-making, leaders assemble their teams, discuss the issues, and welcome proposals on how they can be solved. They are open to feedback and insight, and they rely on input from different departments.
Managers who prefer this style should be careful who they surround themselves with. If they choose people who always agree with them, there is a risk of poor decisions and no variety in opinions.
This kind of decision-making works best when those around them are well-informed on the business processes being discussed and experienced in the practice of carrying them out.
A good example of a decision that should be made collaboratively is whether to increase production.
This affects almost every department. Logistics will have to requisition more raw materials, accounting has to decide whether there is enough cash flow, production will need to put in additional hours, and shipping will have more work to do, as will the sales and marketing departments.
If you make this a command decision, it is likely to meet resistance along the way. You will be more successful if you seek the input of key personnel in every department that is involved.
This works like a democratic vote. The most popular decision is adopted regardless of how management feels about it.
It works well when a decision affects everyone in the workplace or a department. However, it should be adopted only after careful consideration of the issue at hand.
Some decisions would not benefit from everyone’s input. However, in the above example, where a company decides to increase production, basing the decision on a majority vote is ideal.
Low-level employees may not follow market trends or reap any benefit from the long-term effects of higher production now and in the future. Instead, they may vote the decision down because they do not want longer hours or shorter holidays to ruin their personal life or well-being.
Consensus decision-making works best for decisions that affect everyone in the company.
A bad example of a decision that can be made this way is whether to allow employees to work from home. As a manager or CEO, you make it clear that they must meet their production quotas and work for a minimum number of hours every week before putting it to a vote. While this will be extremely helpful to employees who may be disabled, chronically ill, or parents/guardians, it could be voted down by those who simply enjoy the work environment. The preference of the majority should not be prioritized above individual needs. Some decisions require flexible and nuanced solutions.
This involves complete delegation, but one needs to be surrounded by people who are trusted, knowledgeable, and have the best interests of the business at heart. It also requires CEOs to empower their teams so that, when the time comes to make a decision, they can make good choices.
Convenience decision-making is used more often in large organizations where the CEO cannot be involved in every decision.
Rather than spread themselves too thin, micromanaging those beneath them, they empower them and allow them to research, analyze data and come to decisions that serve the business.
Convenience decision-making has pitfalls. If a decision goes poorly, the CEO must bear the brunt; he cannot blame others in the organization and must clean up the resulting mess.
What makes decision-making difficult?
We all make thousands of decisions each day, and yet many of us feel that the hardest thing to do is come to a decision, especially when failure can have significant consequences.
There are certain pitfalls to look out for if you want to be the sort of manager who is known for making sound decisions:
Too much data
Data is good; numbers tell us things like current and projected sales, the cost variables in different departments, how customers react to different price points, and more.
At the same time, focusing too much on data often gets leaders side-tracked. A good leader understands that while numbers matter, they aren’t everything. Understanding why the numbers are the way they are is more important than the numbers themselves.
If you find yourself looking at lots of data and still unable to make a decision, the reason may be that data only works up to a certain point.
Smart managers ask their data people to crunch and analyze numbers into a few that are relevant, easy to understand, and give an accurate picture of the current situation.
Too much information
Excessive information can be detrimental, especially when you need to make quick decisions.
Have you ever looked at a Netflix catalog with thousands of movie titles and found it difficult to choose one? Or walked an aisle in the supermarket and were unable to choose a product because there were too many brands? Smart CEOs understand that too much information can obscure the real issues in their organizations and can make solutions evasive. They hire people to sift through the information and highlight what is important.
This can be difficult for small business managers who may not have a budget to hire analysts, so management must do all the work.
To make things a little easier, find reliable and trustworthy sources. Identify websites, magazines, and blogs that do the analysis but remember to double-check all information before you act on it.
Sometimes managers have the right data and necessary information but still find it difficult to make a decision. This is called decision paralysis, and it is driven by the fear of being wrong.
It happens, but if you find it happens often, it may be a sign that you need help. You may want to surround yourself with knowledgeable people who help you process things a little faster.
Tips on making the right business decisions
What can CEOs and senior management do to become better decision-makers? Below are a few tips that make it easier to make decisions. However, always remember that different styles of decision-making apply to different situations. What may work for one crisis may fail for another.
- Line up the facts, and split them into pros and cons.
- Every decision you make should consider the future. This does not mean that you should be able to foretell what will happen, but you should be prepared for it.
- Keep your eye on both long and short-term results.
- Track your decisions to find out whether they work.
- Surround yourself with smart people who are decisive but who are prepared to work with others and listen to their opinions.
- Avoid rushing into decisions, especially if they are likely to have a lasting impact.
- Remember, it is not always about business; people matter too.
- Do not be afraid to admit it when a decision is not right. Make adjustments where necessary.
As a CEO or senior manager, you will be faced with decisions every day, and you must make the right choices. It can be a daunting business, but you get better at it with time. Experience plays a big role in good decision-making, but you can improve your skills by enrolling in an executive doctorate. It is an advanced course for business managers that teaches research, analysis, and decision-making.