Big-bet decisions are pivotal for shaping a company's future and represent the most critical choices that its leaders must make. Typically, these decisions are the responsibility of the top management team and the board. However, even for accomplished entrepreneurs, success is not a foregone conclusion. This is what makes decision-making both fascinating and challenging: the promise of opportunity and the risk of failure.
While we cannot control the future, we can control how we approach potential undesirable outcomes. By adopting a proactive approach towards uncertainty, businesses can increase their chances of success. Therefore, while we cannot predict what the future holds, we can take charge of our decision-making processes, and this can help us navigate through uncertainty, increase our adaptability, and achieve our desired goals. Or at least come closer to it.
Research shows that for typical big-bet decisions (such as a possible acquisition), there is often as little as a 20% chance that the decision(s) you make will lead to the outcome you desire. This means that even with rough assumptions, the probability of success is often much lower than we think, with 8 out of 10 times not leading to the expected outcome. Therefore, it's essential to challenge the success case and facilitate "what-if" discussions to identify potential risks and consider alternative outcomes.
It surprises many managers that even a few risk factors (of which they have helped to identify) can impact the probabilities such that the desired outcome becomes less likely to occur than the combination of the alternative outcomes. Imagine a big-bet decision with five critical and sequential risk factors, each having only a 20% chance of occurring. Each risk factor may be acceptable on its own, but the combined picture is different. The probability for the desired outcome in this example is reduced to a mere 33%. The expected value of the desired outcome is also reduced accordingly.
Figure: The probability for the desired outcome is reduced to 33%. The expected value is $115k x 33% = $38k.
To gain a better understanding of a big-bet decision, it is a good advise to put as much focus on what we cannot control as on the desired outcome itself. Summarising risk discussions into a decision tree or a similar visual format can provide a common understanding of the situation. By doing so, we can make the team aware of the alternative decisions and the risks associated with them. While success is the ultimate goal, considering alternative outcomes and determining how we can handle them is a vital part of the success formula. More often than not, the worst-case scenario is not a single failure, but rather, an unclear outcome that can lead to subsequent decisions (and costs) to “fix the problem".
By understanding the drivers of uncertainty and the potential risks, we can maintain flexibility in our business plan and increase our chances of success. Successful decision-makers often possess an intuitive understanding of risk (alongside opportunity) and the importance of maintaining flexibility in their business plan. By approaching decisions with a mindset of alternatives and step-wise decisions, we can navigate uncertainty and increase our chances of success. And by embracing the possibility of failure and planning how to handle it, we can increase our chances of success in the long run.
In conclusion, decision-making is a crucial component of business success. By approaching big-bet decisions with a thorough understanding of the risks and potential outcomes, we can navigate uncertainty and increase our chances of success. Success is never guaranteed, but by embracing flexibility, planning for possible alternative outcomes, and taking a comprehensive approach to decision-making, we can set ourselves up for success in the long run.