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The Effective Decision results from a systematic process, with clearly defined elements, that is handled in a distinct sequence of steps. By Peter F. Drucker Effective executives do not make a great many decisions. They concentrate on what is impor- tant. They try to make the few important deci- sions on the highest level of conceptual under- standing. They try to find the constants in a situation, to think through what is strategic and generic rather than to "solve problems." They are, therefore, not overly impressed by speed in decision making; rather, they consider virtuosity in manipulating a great many variables a symp- tom of sloppy thinking. They want to know what the decision is all about and what the un- derlying realities are which it has to satisfy. They want impact rather than technique. And they want to be sound rather than clever. Effective executives know when a decision has to be based on principle and when it should be made pragmatically, on the merits of the case. They know the trickiest decision is that between the right and the wrong compromise, and they have learned to tell one from the other. They know that the most time-consuming step in the process is not making the decision but putting it into effect. Unless a decision has "degenerated into work," it is not a decision; it is at best a good intention. This means that, while the effective decision itself is based on the highest level of conceptual understand- ing, the action commitment should be as close as possible to the capacities of the people who have to carry it out. Above all, effective execu- 92 tives know that decision making has its own systematic process and its own clearly defined elements. Sequential Steps The elements do not by themselves "make" the decisions. Indeed, every decision is a risk- taking judgment. But unless these elements are the stepping-stones of the executive's decision process, he will not arrive at a right, and cer- tainly not at an effective, decision. Therefore, in this article I shall describe the sequence of steps involved in the decision-making process. There are six such steps: 1. The classification of the problem. Is it ge- neric? Is it exceptional and unique? Or is it the first manifestation of a new genus for which a rule has yet to be developed? 2. The definition of the problem. What are we dealing with? 3. The specifications which the answer to the problem must satisfy. What are the "boundary conditions"? 4. The decision as to what is "right," rather than what is acceptable, in order to meet the boundary conditions. What will fully satisfy the specifications before attention is given to the com- promises, adaptations, and concessions needed to make the decision acceptable? AUTHOR'S NOTE: This article is derived from a chapter in my forthcoming book, The Effective Executive, to be published by Harper & Row, Publishers, Inc. Copyright 2000. All Rights Reserved. 5. The building into the decision of the action to carry it out. What does the action commitment have to be? Who has to know about it? 6. The feedback which tests the validity and effectiveness of the decision against the actual course of events. How is the decision being car- ried out? Are the assumptions on which it is based appropriate or obsolete? Let us take a look at each of these individual elements. The Classification The effective decision maker asks: Is this a symptom of a fundamental disorder or a stray event? The generic always has to be answered through a rule, a principle. But the truly ex- ceptional event can only be handled as such and as it comes. Strictly speaking, the executive might dis- tinguish among four, rather than between two, different types of occurrences. First, there is the truly generic event, of which the individual occurrence is only a symp- tom. Most of the "problems" that come up in the course of the executive's work are of this nature. Inventory decisions in a business, for instance, are not "decisions." They are adapta- tions. The problem is generic. This is even more likely to be true of occurrences within manufacturing organizations. For example: A product control and engineering group will typically handle many hundreds of problems in the course of a month. Yet, whenever these are analyzed, the great majority prove to be just symp- toms and manifestations of underlying basic situations. The individual process control engi- neer or production engineer who works in one part of the plant usually cannot see this. He might have a few problems each month with the coup- lings in the pipes that carry steam or hot liquids, and that's all. Only when the total workload of the group over several months is analyzed does the generic prob- lem appear. Then it is seen that temperatures or pressures have become too great for the existing equipment and that the couplings holding the various lines together need to be redesigned for greater loads. Until this analysis is done, process control will spend a tremendous amount of time fixing leaks without ever getting control of the situation. The second type of occurrence is the prob- lem which, while a unique event for the indi- vidual institution, is actually generic. Consider: The Effective Decision 93 The company that receives an offer to merge from another, larger one, will never receive such an offer again if it accepts. This is a nonrecurrent situation as far as the individual company, its board of directors, and its management are con- cerned. But it is, of course, a generic situation which occurs all the time. Thinking through whether to accept or to reject the offer requires some general rules. For these, however, the execu- tive has to look to the experience of others. Next there is the truly exceptional event that the executive must distinguish. To illustrate: The huge power failure that plunged into dark- ness the whole of Northeastern North America from the St. Lawrence to Washington in Novem- ber 1965 was, according to first explanations, a truly exceptional situation. So was the thalidomide tragedy which led to the birth of so many deformed babies in the early 1960's. The probability of either of these events occurring, we were told, was one in ten million or one in a hundred million, and concatenations of these events were as unlikely ever to recur again as it is unlikely, for instance, for the chair on which I sit to disintegrate into its constituent atoms. Truly unique events are rare, however. When- ever one appears, the decision maker has to ask: Is this a true exception or only the first mani- festation of a new genus? And this the early manifestation of a new generic problem is the fourth and last category of events with which the decision process deals. Thus: _ We know now that both the Northeastern power failure and the thalidomide tragedy were only the first occurrences of what, under conditions of mod- ern power technology or of modern pharmacology, are likely to become fairly frequent occurrences unless generic solutions are found. All events but the truly unique require a generic solution. They require a rule, a policy, or a principle. Once the right principle has been developed, all manifestations of the same ge- neric situation can be handled pragmatically that is, by adaptation of the rule to the concrete circumstances of the case. Truly unique events, however, must be treated individually. The executive cannot develop rules for the excep- tional. The effective decision maker spends time determining with which of the four different types of the above situations he is dealing. He knows that he will make the wrong decision if he classifies the situation incorrectly. By far the most common mistake of the deci- Copyright 2000. All Rights Reserved. 94 HBR Jan.-Feb. 1967 sion maker is to treat a generic situation as if it were a series of unique events - that is, to be pragmatic when lacking the generic understand- ing and principle. The inevitable result is frus- tration and futility. This was clearly shown, I think, by the failure of most of the policies, both domestic and foreign, of the Kennedy Adminis- tration. Consider: - For all the brilliance of its members, the Ad- ministration achieved fundamentally only one suc cess, and that was in the Cuban missile crisis. Otherwise, it achieved practically nothing. The main reason was surely what its members called "pragmatism" namely, the Administration's re- fusal to develop rules and principles, and its in- sistence on treating everything "on its merits." Yet it was clear to everyone, including the members of the Administration, that the basic assumptions on which its policies rested the valid assump- tions of the immediate postwar years - had be- come increasingly unrealistic in international, as well as in domestic, affairs in the 1960's. Equally common is the mistake of treating a new event as if it were just another example of the old problem to which, therefore, the old rules should be applied: This was the error that snowballed the local power failure on the New York-Ontario border into the great Northeastern blackout. The power engineers, especially in New York City, applied the right rule for a normal overload. Yet their own instruments had signaled that something quite extraordinary was going on which called for ex- ceptional, rather than standard, countermeasures. By contrast, the one great triumph of Presi- dent Kennedy in the Cuban missile crisis rested on acceptance of the challenge to think through an extraordinary, exceptional occurrence. As soon as he accepted this, his own tremendous resources of intelligence and courage effective- ly came into play. The Definition Once a problem has been classified as generic or unique, it is usually fairly easy to define. "What is this all about?" "What is pertinent here?" "What is the key to this situation?" Questions such as these are familiar. But only the truly effective decision makers are aware that the danger in this step is not the wrong definition, it is the plausible but incomplete one. For example: The American automobile industry held to a plausible but incomplete definition of the prob- - lem of automotive safety. It was this lack of aware- ness - far more than any reluctance to spend money on safety engineering that eventually, in 1966, brought the industry under sudden and sharp Congressional attack for its unsafe cars and then left the industry totally bewildered by the attack. It simply is not true that the industry has paid scant attention to safety. On the contrary, it has worked hard at safer highway engineering and at driver training, believ- ing these to be the major areas for concern. That accidents are caused by unsafe roads and unsafe drivers is plausible enough. Indeed, all other agencies concerned with automotive safety, from the highway police to the high schools, picked the same targets for their campaigns. These cam- paigns have produced results. The number of accidents on highways built for safety has been greatly lessened. Similarly, safety-trained drivers have been involved in far fewer accidents. But although the ratio of accidents per thou- sand cars or per thousand miles driven has been going down, the total number of accidents and the severity of them have kept creeping up. It should therefore have become clear long ago that some- thing would have to be done about the small but significant probability that accidents will occur despite safety laws and safety training. This means that future safety campaigns will have to be supplemented by engineering to make accidents themselves less dangerous. Whereas cars have been engineered to be safe when used cor- rectly, they will also have to be engineered for safety when used incorrectly. There is only one safeguard against becoming the prisoner of an incomplete definition: check it again and again against all the observable facts, and throw out a definition the moment it fails to encompass any of them. The effective decision maker always tests for signs that something is atypical or something unusual is happening. He always asks: Does the definition explain the observed events, and does it explain all of them? He always writes out what the definition is expected to make hap- pen for instance, make automobile accidents disappear and then tests regularly to see if this really happens Finally, he goes back and thinks the problem through again whenever he sees something atypical, when he finds phe- nomena his explanation does not really explain, or when the course of events deviates, even in details, from his expectations. These are in essence the rules Hippocrates laid down for medical diagnosis well over 2,000 years ago. They are the rules for scientific ob- Copyright 2000. All Rights Reserved. servation first formulated by Aristotle and then reaffirmed by Galileo 300 years ago. These, in other words, are old, well-known, time-tested rules, which an executive can learn and apply systematically. The Specifications The next major element in the decision pro- cess is defining clear specifications as to what the decision has to accomplish. What are the ob- jectives the decision has to reach? What are the minimum goals it has to attain? What are the conditions it has to satisfy? In science these are known as "boundary conditions." A decision, to be effective, needs to satisfy the boundary conditions. Consider: "Can our needs be satisfied," Alfred P. Sloan, Jr. presumably asked himself when he took com- mand of General Motors in 1922, "by removing the autonomy of our division heads?" His answer was clearly in the negative. The boundary condi- tions of his problem demanded strength and re- sponsibility in the chief operating positions. This was needed as much as unity and control at the center. Everyone before Sloan had seen the prob- lem as one of personalities to be solved through a struggle for power from which one man would emerge victorious. The boundary conditions, Sloan realized, demanded a solution to a constitutional problem to be solved through a new structure: decentralization which balanced local autonomy of operations with central control of direction and policy. A decision that does not satisfy the boundary conditions is worse than one which wrongly de- fines the problem. It is all but impossible to salvage the decision that starts with the right premises but stops short of the right conclu- sions. Furthermore, clear thinking about the boundary conditions is needed to know when a decision has to be abandoned. The most com- mon cause of failure in a decision lies not in its being wrong initially. Rather, it is a subse- quent shift in the goals - the specifications which makes the prior right decision suddenly inappropriate. And unless the decision maker has kept the boundary conditions clear, so as to make possible the immediate replacement of the outflanked decision with a new and appropriate policy, he may not even notice that things have changed. For example: Franklin D. Roosevelt was bitterly attacked for his switch from conservative candidate in 1932 to radical President in 1933. But it wasn't Roose- The Effective Decision 95 velt who changed. The sudden economic collapse which occurred between the summer of 1932 and the spring of 1933 changed the specifications. A policy appropriate to the goal of national economic recovery which a conservative economic policy might have been - was no longer appropriate when, with the Bank Holiday, the goal had to be- come political and social cohesion. When the boundary conditions changed, Roosevelt immedi- ately substituted a political objective (reform) for his former economic one (recovery). Above all, clear thinking about the boundary conditions is needed to identify the most dan- gerous of all possible decisions: the one in which the specifications that have to be satisfied are essentially incompatible. In other words, this is the decision that might just might work if nothing whatever goes wrong. A classic case is President Kennedy's Bay of Pigs decision: One specification was clearly Castro's overthrow. The other was to make it appear that the invasion was a "spontaneous" uprising of the Cubans. But these two specifications would have been com- patible with each other only if an immediate island-wide uprising against Castro would have completely paralyzed the Cuban army. And while this was not impossible, it clearly was not probable in such a tightly controlled police state. Decisions of this sort are usually called gam- bles." But actually they arise from something much less rational than a gamble - namely, a hope against hope that two (or more) clearly incompatible specifications can be fulfilled si- multaneously. This is hoping for a miracle; and the trouble with miracles is not that they happen so rarely, but that they are, alas, singu- larly unreliable. Everyone can make the wrong decision. In fact, everyone will sometimes make a wrong decision. But no executive needs to make a de- cision which, on the face of it, seems to make sense but, in reality, falls short of satisfying the boundary conditions. The Decision The effective executive has to start out with what is "right" rather than what is acceptable precisely because he always has to compromise in the end. But if he does not know what will satisfy the boundary conditions, the decision maker cannot distinguish between the right compromise and the wrong compromise - and may end up by making the wrong compromise. Consider: Copyright 2000. All Rights Reserved. 96 HBR Jan.-Feb. 1967 I was taught this when I started in 1944 on my In fact, no decision has been made unless carry- first big consulting assignment. It was a study of ing it out in specific steps has become someone's the management structure and policies of General Motors Corporation. Alfred P. Sloan, Jr., who was then chairman and chief executive officer of the company, called me to his office at the start of my assignment and said: "I shall not tell you what to study, what to write, or what conclusions to come to. This is your task. My only instruction to you is to put down what you think is right as you see it. Don't you worry about our reaction. Don't you worry about whether we will like this or dislike that. And don't you, above all, concern yourself with the compromises that might be needed to make your conclusions acceptable. There is not one executive in this company who does not know how to make every single conceivable compromise without any help from you. But he can't make the right compromise unless you first tell him what right is." The effective executive knows that there are two different kinds of compromise. One is ex- pressed in the old proverb: "Half a loaf is bet- ter than no bread." The other, in the story of the Judgment of Solomon, is clearly based on the realization that "half a baby is worse than no baby at all." In the first instance, the bound- ary conditions are still being satisfied. The pur- pose of bread is to provide food, and half a loaf is still food. Half a baby, however, does not satisfy the boundary conditions. For half a baby is not half of a living and growing child. It is a waste of time to worry about what will be acceptable and what the decision maker should or should not say so as not to evoke re- sistance. (The things one worries about seldom happen, while objections and difficulties no one thought about may suddenly turn out to be al- most insurmountable obstacles.) In other words, the decision maker gains nothing by starting out with the question: "What is acceptable?" For in the process of answering it, he usually gives away the important things and loses any chance to come up with an effective let alone the right - answer. The Action Converting the decision into action is the fifth major element in the decision process. While thinking through the boundary conditions is the most difficult step in decision making, convert- ing the decision into effective action is usually the most time-consuming one. Yet a decision will not become effective unless the action com- work assignment and responsibility. Until then, it is only a good intention. The flaw in so many policy statements, espe- cially those of business, is that they contain no action commitment - to carry them out is no one's specific work and responsibility. Small wonder then that the people in the organization tend to view such statements cynically, if not as declarations of what top management is really not going to do. Converting a decision into action requires answering several distinct questions: Who has to know of this decision? What action has to be taken? Who is to take it? What does the action have to be so that the people who have to do it can do it? The first and the last of these questions are too often overlooked with dire results. A story that has become a legend among operations researchers illustrates the importance of the question, "Who has to know?": A major manufacturer of industrial equipment decided several years ago to discontinue one of its models that had for years been standard equip- ment on a line of machine tools, many of which were still in use. It was, therefore, decided to sell the model to present owners of the old equipment for another three years as a replacement, and then to stop making and selling it. Orders for this par- ticular model had been going down for a good many years. But they shot up immediately as cus- tomers reordered against the day when the mod- el would no longer be available. No one had, however, asked, "Who needs to know of this decision?" Consequently, nobody informed the purchasing clerk who was in charge of buying the parts from which the model itself was being assembled. His instructions were to buy parts in a given ratio to current sales and the instructions remained unchanged. Thus, when the time came to discontinue fur- ther production of the model, the company had in its warehouse enough parts for another 8 to 10 years of production, parts that had to be written off at a considerable loss. The action must also be appropriate to the capacities of the people who have to carry it out. Thus: A large U.S. chemical company found itself, in recent years, with fairly large amounts of blocked currency in two West African countries. To pro- tect this money, top management decided to invest mitments have been built into it from the start. it locally in businesses which (a) would contribute Copyright 2000. All Rights Reserved. to the local economy, (b) would not require im- ports from abroad, and (c) would if successful be the kind that could be sold to local investors if and when currency remittances became possible again 97 The Effective Decision rather than a nationalized, telephone system. Yet this policy statement might have remained a dead letter if Vail had not at the same time designed yardsticks of service performance and introduced ward, managerial performance. The Bell mana- gers of that time were used to being measured by which, up until then, had suffered serious spoilage the profitability (or at least by the cost) of their units. The new yardsticks resulted in the rapid acceptance of the new objectives To establish these businesses, the company devel- these as a means to measure, and ultimately to re- oped a simple chemical process to preserve a trop- ical fruit a staple crop in both countries in transit to its Western markets The business was a success in both countries. But in one country the local manager set the busi- ness up in such a manner that it required highly skilled and technically trained management of a kind not easily available in West Africa. In the other country the local manager thought through the capacities of the people who would eventually have to run the business. Consequently, he worked hard at making both the process and the business simple, and at staffing his operation from the start with local nationals right up to the top manage- ment level. effective a In sharp contrast is the recent failure of a brilliant chairman and chief executive to make new organization structure and new objectives in an old, large, and proud U.S. com- pany. Everyone agreed that the changes were needed. The company, after many years as leader of its industry, showed definite signs of aging. In many markets newer, smaller, and more aggres- sive competitors were outflanking it. But contrary to the action required to gain acceptance for the A few years later it became possible again to new ideas, the chairman in order to placate transfer currency from these two countries. But, the opposition promoted prominent spokesmen though the business flourished, no buyer could be found for it in the first country. No one available locally had the necessary managerial and technical skills to run it, and so the business had to be liqui- dated at a loss. In the other country so many local entrepreneurs were eager to buy the business that the company repatriated its original investment with a substantial profit. The chemical process and the business built on it were essentially the same in both places. But in the first country no one had asked: "What kind of people do we have available to make this deci- sion effective? And what can they do?" As a result, the decision itself became frustrated. This action commitment becomes doubly im- portant when people have to change their havior, habits, or attitudes if a decision is to become effective. Here, the executive must make sure not only that the responsibility for be- the action is clearly assigned, but that the people assigned are capable of carrying it out. Thus the decision maker has to make sure that the measurements, the standards for accomplish- ment, and the incentives of those charged with the action responsibility are changed simultane- ously. Otherwise, the organization people will get caught in a paralyzing internal emotional conflict. Consider these two examples: When Theodore Vail was president of the Bell Telephone System 60 years ago, he decided that the business of the Bell System was service. This decision explains in large part why the United States (and Canada) has today an investor-owned, of the old school into the most visible and highest salaried positions in particular into three new executive vice presidencies. This meant only one thing to the people in the company: "They don't really mean it." If the greatest rewards are given for behavior contrary to that which the new course of action requires, then everyone will conclude that this is what the people at the top really want and are going to reward. Only the most effective executive can do what Vail did build the execution of his decision into the decision itself. But every executive can think through what action commitments a spe- cific decision requires, what work assignments follow from it, and what people are available to carry it out. The Feedback Finally, information monitoring and report- ing have to be built into the decision to provide continuous testing, against actual events, of the expectations that underlie the decisions. Deci- becomes sions are made by men. Men are fallible; at best, their works do not last long. Even the best decision has a high probability of being wrong. Even the most effective one eventually obsolete. This surely needs no documentation. And every executive always builds organized feed- - reports, figures, studies into his de- back - cision to monitor and report on it. Yet far too many decisions fail to achieve their anticipated results, or indeed ever to become effective, de- Copyright 2000. All Rights Reserved. 98 HBR Jan.-Feb. 1967 abstractions. spite all these feedback reports. Just as the view from the Matterhorn cannot be visualized by studying a map of Switzerland (one abstraction), a decision cannot be fully and accurately evalu- ated by studying a report. That is because re- ports are of necessity Effective decision makers know this and fol- low a rule which the military developed long ago. The commander who makes a decision does not depend on reports to see how it is be- ing carried out. He or one of his aides - goes and looks. The reason is not that effective decision makers (or effective commanders) dis- trust their subordinates. Rather, the reason is that they learned the hard way to distrust ab- stract "communications." With the coming of the computer this feed- But unless he builds his feedback around direct back element will become even more important, for the decision maker will in all likelihood be even further removed from the scene of action. Unless he accepts, as a matter of course, that from he had better go out and look at the scene of action, he will be increasingly divorced reality. All a computer can handle is abstrac- tions. And abstractions can be relied on only if they are constantly checked against concrete results. Otherwise, they are certain to mislead. To go and look is also the best, if not the only way, for an executive to test whether the assumptions on which his decision has been made are still valid or whether they are becom- ing obsolete and need to be thought through again. And the executive always has to expect it has ceased to be appropriate or even rational. This is true for business decisions as well as for governmental policies. It explains in large mea- sure the failure of Stalin's cold war policy in Europe, but also the inability of the United States to adjust its policies to the realities of a Europe restored to prosperity and economic growth, and the failure of the British to accept, until too late, the reality of the European Com- mon Market. Moreover, in any business I know, failure to go out and look at customers and mar- kets, at competitors and their products, is also a major reason for poor, ineffectual, and wrong The decision maker needs organized informa- tion for feedback. He needs reports and figures. exposure to reality - unless he disciplines him- decisions. self to go out and look - he condemns himself to a sterile dogmatism. Concluding Note Decision making is only one of the tasks of an executive. It usually takes but a small frac- tion of his time. But to make the important decisions is the specific executive task. Only an executive makes such decisions. An effective executive makes these decisions as a systematic process with clearly defined ele- ments and in a distinct sequence of steps. In- deed, to be expected (by virtue of position or the assumptions to become obsolete sooner or knowledge) to make decisions that have signifi- later. Reality never stands still very long. cant and positive impact on the entire organiza- Failure to go out and look is the typical rea- tion, its performance, and its results character- son for persisting in a course of action long after izes the effective executive. "The cause of lightning," Alice said very decidedly, for she felt quite sure about this, "is the thunder - no, no!" she hastily corrected herself, "I meant the "It's too late to correct it," said the Red Queen: other way." "When you've once said a thing, that fixes it, and you must take the consequences." Lewis Carroll, Through the Looking Glass Copyright 2000. All Rights Reserved. Harvard Business Review and Harvard Business School Publishing content on EBSCOhost is licensed for the individual use of authorized EBSCOhost patrons at this institution and is not intended for use as assigned course material. 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