Poor Richard's Junto: management science, entrepreneurship, business ownership, management

This blog dares leaders to do better. We encourage those managers with the wits to change and we exchange ideas in management science to mutual benefit and personal development. This is the place for those leaders who admonish folly and hubris and yet are devoted to continuous mental development, entrepreneurship, business ownership, & business management. As such, let this be a forum for thought leaders, CEOs, and business owners as Ben Franklin once did with the Junto and his almanac.

If two men exchange dollars; each man stands to gain a dollar. However, let these men exchange ideas, and each stands to gain a fortune.

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Monday, February 14, 2011

Management Decision Assistance Tools

Thank you. I had an overwhelming response to the article I wrote on inversion as a method of testing proposed solutions prior to implementation. I was asked to elaborate on the subject so I put together a few more tools for your management war chest that can aid in your decision process. I hope you get as much out of these tools as I have over the years.

Short to Ground: I learned this one from Bill Swanson, CEO of Raytheon when I spent half a day with him while getting my MBA. Bill has an engineering background so, in thinking in terms of circuit design, it’s often helpful to find the quickest path to ground to test the circuit. Applying this line of thinking to drawn-out problems, Bill suggests you “short them to ground” as follows. “If you sense that your organization is spending more time on the bureaucracy of solving a problem than on the actual solution, you need to simplify the problem-solving process.  Shorting issues to ground means finding the quickest path – from problem to solution – avoiding non-value-added procedures and delays.” 

Substitution: I love Bill’s phrase “non-value added” because I’ve so often heard the phrase, “I think there’s value in this” as a justification for a process or project’s ongoing existence in large companies. If the test of an action’s validity is merely “whether or not there’s value” rather than “what’s the highest and best use of resources”, then that company can expect a good dose of mediocrity. To find out the highest and best use of resources, one must consider the various substitutions for the proposed action. As an example, I’ve personally used this to evaluate buying a small business. If I were willing to pay a million dollars to purchase a business, I should also ask myself if I could build the business with less risk for a million dollars. I would then use my answer as a go/no-go decision tool or as a way to gauge if there’s a premium or discount to the asking price.  

Probability: Leaders are often required to make decisions with incomplete information. Decisions in this environment are similar to gambling; you don’t know the exact cards the dealer is holding but you can use probabilities to increase your advantage over time.  Therefore, getting a good handle on how to apply probabilities to real life scenarios is an essential tool. Just like in gambling, the professional players that systematically calculate the odds have a huge advantage over rookies who just wing it. I recommend the book Against the Gods as a good resource to learn about probabilities and their history (which were rooted in gambling and discovered over a series of letters between Pascal and Fermat).

Cumulative Probabilities: If you’re strong with basic probabilities than move up to cumulative probabilities. The ramifications of cumulative odds were famously highlighted in the space shuttle Challenger disaster. The infamous O-rings were used in combination with other O-rings which were suppose to create a system of redundancy and further protection if any one ring should fail. The thought was: more is better. In reality, the redundancy in cold weather created cumulative probabilities in the failure rate that led to an eventuality of failure. For fun, read the article Winning vs. Not Losing to see how cumulative probabilities can be used in investment decisions; the results may surprise you.

The Probability of You: If you’ve mastered the odds, there’s still one very important lesson to learn that comes from the field of logic. If a doctor tells you that you have only a one-in-a-million chance of dying during a surgery you’re going under; you’d probably feel a great sense of relief. However, logic teaches us to question broadly applied probabilities in favor of personal application. In other words, under the same odds of one-in-a-million, you can have a one hundred percent probability that you will be the one person out of a million to die on the operating table.  There may be a set of factors such as heart disease, high blood pressure, or allergies that when taken into consideration, completely changes the odds when applied to your specific situation. For instance, I’ve read that the odds of getting caught shoplifting are something like 1 in 10. But, what are the odds if you’re Lindsay Lohan shoplifting? With a questionable IQ, the media all over you, and people ready to throw you under the bus for their own gain; I’d bet the odds of getting caught are as close to a sure thing as you can get!

Perspectives: To avoid surprises in proposed solutions, it helps to step back and run through a checklist of multiple perspectives to ensure alignment. For example, how might we consider an idea to speed up a sales order by implementing a new point of sale system? Management thinks this will be a great way to reduce AR and get more cash in the business. First, we could ask ourselves who the stakeholders are.  Maybe it’s the customer, investors, purchasing, sales, the finance team, etc.  Next, we can ask what concerns they might they have. Through this process we may uncover that speeding up the sales process may require the customer to pay quicker than they are prepared for. This could lead more customers to purchase on terms, which could lead the finance department to misstate projections, which could throw off the headcount for AR, which could lead management to assume there would be more free capital for expansion, which could disappoint investors who thought that capital should have been held in reserve to begin with! With careful consideration of the many involved perspectives, prepared project roll-out can be implemented with fewer unpleasant surprises.

What’s Missing: It’s easy to focus on what’s in front of you and it’s rare to see what’s missing. The next time someone presents to you, ask yourself what’s missing. This holds especially valuable when someone has been referred to you and your guard may down. I should note, this is all a mental process and is not something a mature leader needs to confront a person on causing them to lose face. But, as a mental exercise, you may ask yourself things like what’s the source of data, have the assumptions been validated and how, what are the credentials of the presenter and their motivations, or why haven’t I heard of this before. This practice seems obvious but the discipline in purposefully applying it can be elusive. To demonstrate the practical and helpful nature of this practice, I merely have to mention the name: Bernie Madoff. 

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