How decisions can go wrong

By Mark L. Fagan

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To close out this four-part series on CEO decision-making, I want to take a look at a few big decisions that failed and identify why they failed. As previously discussed, examples of big decisions include selling or purchasing a significant business unit; making a significant change to product or service offerings; and restructuring the management team.

To recap the first three parts of this series, a CEO needs the following to improve the chances of a big decision being successful:

A company’s management team and key employees must be in alignment before a significant change is introduced by the CEO. If not, probability for success plummets. Why? Because change is difficult and requires buy-in and commitment to a common goal from management and key employees. If those characteristics are not present before a change, chances are they won’t be afterwards either.

It’s the responsibility of the CEO to find smart, experienced people who can advise the CEO when big decisions are being made. What tends to happen is a CEO will, over time, gravitate to the people with more valuable views, often found inside and outside the company. An informal inner circle creates a flexible situation for the CEO with minimal downside because its members can change depending on the talent needs of the CEO; it is not on any corporate organization chart, so employees can’t lobby for inclusion; it can be filled with people outside the organizations who have no stake in the decision’s outcome; and it leaves the executive committee’s time to be used more effectively.

Implementing big decisions will involve a multitude of smaller, tactical and strategic decisions. Organizations that build a strong capability for making and implementing big decisions employ sound processes, including investigating multiple alternatives, seeking out dissent, and fostering a culture of inquiry for weaving down the path of implementation, rather than advocacy or going with gut feelings. They also employ data and analysis because they know that on a whole, the scientific method is the best guide to making decisions.

A FEW BIG DECISIONS GONE BAD:

Royal Bank of Scotland — With more than £1.9 trillion in assets, the bank failed and had to be rescued in 2008. A Financial Services Authority report identified seven reasons for the failure, including inadequate due-diligence in acquiring the Dutch Bank ABN-AMRO; inappropriate attention to risk; and underlying deficiencies in RBS management, governance and culture, which made it prone to make poor decisions.

Time Warner AOL Merger — This megamerger had a deal value of $350 billion. Ten years after the January 2000 merger, the combined value of the companies, which have been separated, was about one-seventh of the worth on the day of the merger and is taught in business schools as the worst transaction in history.

The enduring debate is whether the deal collapsed because the concept was flawed at the start or because the cultures were too different and the execution of the merger was a failure. One thing is apparent from reading interviews with Stephen Case, AOL co-founder, and Jerry Levin, CEO of Time Warner: There were only a handful of people involved in the decision. The team included each company’s president, Robert Pittman and Richard Parsons, but few others. Upon hearing of the merger, which was disclosed to each company’s leadership teams just hours before announcing to the public, many senior executives thought it was an awful idea.

Case believes it was a good idea but poorly executed. Levin used to think it was the clash of cultures and a mis-reading of the dot-com bubble, but now thinks it was that the “rolling thunder of the internet started actually to eat its own, which was AOL. AOL was the Google of its time.” Parsons thinks it started with the business model being flawed and then finally the cultural matter. “It was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.”

Kmart — Kmart’s big mistake in the mid-to-late 1990s was to try to compete with Walmart on price. Walmart had a supply chain system known as “just-in-time” inventory, which allowed the retailer to re-stock shelves efficiently. Kmart failed to implement a similar system, which meant consumers became frustrated when stores ran out of goods. Between June 1998 and June 2000, Walmart’s stock price rose 82 percent as Kmart’s fell 63 percent. While new management at the turn of the decade worked to improve efficiency, the company filed for bankruptcy in 2002 and shut hundreds of stores and eventually merged with Sears.

A couple of opinions:

In 2012, a study by Douglas McIntyre, Ashley Allen, Samuel Weigley and Michael B. Sauter concluded that the worst bad decisions fell into three categories:

  1. Management was reckless and managers ignored internal warnings that their decisions were highly risky.
  2. Management missed major shifts in their industries until it was too late.
  3. Managers showed a general lack of foresight.

Gary Cokin is an author and founder of Analytics-Based Performance Management LLC, an advisory firm. He notes that “companies that successfully use their information to outthink, outsmart and out-execute their competitors are high-performing enterprises. They build their strategies around information-driven insights that generate results from the power of analytics of all flavors, such as segmentation and regression analysis, and especially predictive analytics. They are proactive, not reactive.”

In summary:

CEOs and their teams will continue to have decision failures. Big decisions create change, which is something most people inherently avoid, so conflicts are imminent. However, if CEOs continually improve the culture and structure of their organization, improve their own decision-making skills and the implementation skills of the entire organization, including the use of more computerized decision support, including analytics, decision failures will decrease.

Mark L. Fagan is a certified public accountant and managing partner of Citrin Cooperman’s Norwalk office. He can be reached at mfagan@citrincooperman.com or 203-847-4068.

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