It’s part of a leader’s role to make decisions, but how do you make the right one?
By Sam Bell, AIM General Manager of Policy and Advocacy
Sam Bell, AIM General Manager of Policy and Advocacy
AIM’s new professional development platform, Leadership Direct, describes “leadership impact” as making the right decisions under pressure. It combines your ability to work effectively and think creatively with your skills for engaging and motivating others to deliver results. To make an impact you need to understand how your business/organisation works, be able to see opportunities for improvement, and have the desire and ability to work with others.
Place yourself in this scenario: you are the chief executive of a market-leading company and looking for opportunities to expand. Your major competitor has recently moved into a new business segment with enormous success – achieving 10-fold growth and boundless prospects. You believe that you can be more successful than your competitor. At this point, you convince your board and leadership team of the merits of your plan and make the decision to enter this new business segment and tackle your major competitor head-on. The market celebrates your decision and you partner with an established US brand to begin the new rollout.
Place yourself in a second scenario: you head a market-leading company that wants to expand. You identify a struggling business, which has been trounced by its main competitor and been stagnant for a decade. You make a leadership decision to significantly outbid two private equity firms and pay well above what the market expected for the struggling business. Analysts doubt whether you are capable of turning it around and believe you will bleed cash trying to take on the entrenched number-one in the market.
Two scenarios, two leadership decisions, but only one winner. Which one would you choose?
Decision-making: Two case studies
Leaders make decisions all the time. Some are bigger than others. Some are also better than others.
The first scenario describes Woolworths’ entry into the hardware business. Woolworths CEO Michael Luscombe made a triumphant announcement in August 2009 that the business would take on the Wesfarmers-owned Bunnings chain with a rollout of 63 new Masters hardware stores. The then director of business development and later Woolworths chief executive, Grant O’Brien, had the unenviable task of building the Masters business from scratch. Sadly, the decision cost Woolworths shareholders $600 million in losses over six years, as capital spending on the business ballooned to more than $3 billion. O’Brien lost his job.
The second scenario is a short story of Wesfarmers’ decision to take over the Coles Group. Within two years of the acquisition, Coles was outperforming its major competitor Woolworths and taking market share. Its success has generated free cash flow that Wesfarmers could only dream about and huge value has been created for shareholders. Wesfarmers’ chief executive, Richard Goyder, successfully identified the growth prospects across the Coles Group and, despite initial market scepticism, his business decision has since been heralded as one of the best in Wesfarmers’ century-long existence.
The moral of these stories is found not in the result, but rather by examining the two initial decisions. Critics labelled the Woolworths leadership team at the time as overconfident. Woolworths was convinced its fairytale run in supermarkets could easily be replicated in the hardware market. The rush to launch stores was ill-conceived, with product stocking and property locations always second-best to Bunnings. In contrast, the Wesfarmers team was focused on people and leadership. They recruited Scotsman Ian McLeod to Coles, creating a positive energy and drive to improve every aspect of the business. These improvements included cleaner stores, fresher produce and lower prices.
As these two scenarios so clearly highlight, for leaders it’s not about getting every decision right; it’s about getting the big decisions right.
10 key principles of good decision-making
- For leaders, developing decision-making skills revolves around 10 key principles:
- Have a clear scope of the decision
- Identify the consequences (intended and unintended)
- Make sure the right people are involved
- Collect relevant information
- Take account of any uncertainties in the decision
- Gather contributions from those you trust
- Use decision-making tools that fit the situation
- Identify any biases in the process
- Communicate the decision clearly and act on it
- Monitor and learn from the outcomes
Leadership Direct AIM’s landmark online professional development tool launches to AIM Members in July 2016. Increase your impact by broadening your knowledge across a broad range of management and leadership topics. Create “learning pathways” for specific areas of interest or development. Find out more at aim.com.au.