Flaws in strategic decision making

Irrational thinking doesn’t just affect individual economic decisions; it affects corporate strategic planning as well. These results highlight the practices of companies that have made successful strategic decisions—and also reveal what the same companies have gotten wrong.

January 2009

Since its inception nearly three decades ago, behavioral economics has upset the pristine premise of classical economic theory—the view that individuals will always behave rationally to achieve the best possible outcome. Today it’s clear that the vagaries of individual and group psychology can cause irrational decision making by both individuals and organizations, resulting in less than ideal outcomes. Even the best-designed strategic-planning processes don’t always lead to optimal decisions. A recent survey by McKinsey attempts to assess the frequency and intensity of the most common managerial biases in companies. Specifically, we asked executives about a single recent strategic decision at their companies that had a clearly satisfactory or unsatisfactory outcome, focusing on the role that various biases may have played.¹

It’s evident from the results that satisfactory outcomes are associated with less bias, thanks to robust debate, an objective assessment of facts, and a realistic assessment of corporate capabilities. A few clear paths to making successful decisions also are apparent. But even when a decision had a satisfactory outcome, executives note several areas where their companies aren’t all that effective, such as aligning incentives with strategic objectives and forecasting competitors’ reactions.² Also notable is that companies that typically make good decisions focus more on their own ability to execute than other companies do, regardless of the outcome of the particular decision described in the survey.

Notes

¹The McKinsey Quarterly conducted the survey in October 2008 and received responses from 2,207 executives representing a global range of industries, regions, and functional specialties.

²This is in line with the results of another survey on how companies respond to competition. See “How companies respond to competitors: A McKinsey Global Survey,” mckinseyquarterly.com, May 2008.

When all goes well

Most companies work hard to make their strategic decision-making processes as rigorous as possible. And when executives are satisfied with the outcome of their decisions, they tend to rate their companies’ processes highly in terms of practices that avoid many biases, though some do creep in (Exhibit 1).³