By now it’s become conventional wisdom that the business world has moved from the Information Age to the Knowledge Era. In the Information Age, information was a relatively scarce resource that conferred competitive advantages on those who obtained it. In the Knowledge Era, by contrast, information is virtually free. We often feel we’re drowning in the stuff. In theory, the true competitive advantage stems from turning all this information into useful knowledge.
It’s a nice theory, as far as it goes. The truth, however, is that even knowledge holds little value until we use it to make decisions. Decision making is the all-important intermediate step between knowledge and action, between strategy and execution. Yet, it remains a somewhat mysterious and often overlooked process, both among individuals and organizations. Only recently has it started to receive the attention it deserves, though this very attention demonstrates how little we truly understand.
One line of inquiry that has become more popular recently is the role of intuition in decision-making. As discussed in a previous TrendWatcher, this is partly due to the influence of Malcolm Gladwell’s book Blink: The Power of Thinking Without Thinking, which details how people can draw excellent conclusions through the process of “rapid cognition,” or what’s sometimes called intuition. As a strategic decision-making practice, however, intuition has its limitations, as described by C. Chet Miller and R. Duane Ireland in the journal Academy of Management Executive (2005).
They provide two conceptualizations of intuitive decision making. First, decisions can be made via a “holistic hunch” that’s based on information drawn from past experiences and synthesized by the subconscious. This remains a poorly understood cognitive process. The second conceptualization, called “automated expertise,” is better understood. “This form of intuition,” they write, “develops over time as relevant experience is accumulated in a particular domain” (p. 21). The classic example is the chess master who, after years of experience, is able to quickly identify familiar situations and apply intricately structured, stored knowledge to those situations (Ross 2006).
As they gain a more sophisticated understanding of these types of intuition, management thinkers should get better at figuring out when to trust intuition as a decision-making strategy and when to rely on more explicit and empirical practices. Toward this end, Miller and Ireland outline the ways in which the holistic hunch and automated expertise can be used. They reach the conclusion that playing hunches can be a useful managerial decision-making tool when companies are exploring new strategies and technologies, as long as managers are not making huge “bet the company” decisions based on those hunches. After all, the record shows that many hunches just don’t pan out. In the exploration process, hunches should be combined with more structured creativity exercises that help managers combine ideas and concepts in new ways to aid in decision making.
As for automated expertise, its most useful application is in the area of judging and exploiting more conventional business situations, strategies and technologies. An experienced manager with real expertise might be able to “see the board” much in the same way that a master chess player does and so make a good decision. But this type of intuitive decision making should be used, recommend Miller and Ireland, only when there’s not enough time or money to engage in other, more explicit methods of decision making.
The danger, of course, is that in a complex business world, automated expertise will be overused. Miller and Ireland note, “Summarizing research on reliability of unaided professional judgment, a recent study reported average consistency of only .61 across medical, meteorological, human-resource, and business decision making. This lack of reliability could be costly as implied errors cause deaths, criminal fines, billions of dollars in business losses, and so on” (p. 26).
It’s little wonder, then, that even as intuition has gained a higher profile, there’s been a simultaneous push toward more evidence-based management. The latter is based on the idea that “empirical analysis of results is the shortest path to the best business results,” according to Stanford University professors Jeffrey Pfeffer and Robert I. Sutton (2006). Their research indicates that organizations gain a competitive advantage when their decision making is based on evidence rather than intuition. Their advice for leaders is to make fact-based decisions and to keep learning, always viewing the organization as a work in progress that can be improved via a continuous testing of assumptions. Leaders should also make a point of hearing bad news as well as good, creating a corporate culture where it’s safe to speak up (Pearlman 2006).
Of course, there’s much more to decision making than just deciding between empirical and intuitive approaches, as noted in a recent HRI Strategic Insight. In the real world, good managers use a combination of different decision-making models and practices, leaning on both evidence and intuition. The trick is to use the right tools at the right time. This should become easier as experts learn more about the cognitive processes underlying decision-making and the success rates of various strategies. It’s likely that decision-making skills and approaches will become a growing part of training and development in the future.
Another aspect of the subject that will probably gain greater prominence in the future is that of organizational decision-making. In flatter organizations filled with knowledge workers, decisions often must be made quickly and in an agile fashion. Therefore, organizations should routinely address how they distribute decision-making authority, avoiding too much centralization, too much democracy and too much ambiguity about who has the authority (Jacobs 2005).
Companies will also need to pay increasing attention to what some researchers are deeming the “cognitive style” of specific decision-making groups (Leonard, Beauvais and Scholl 2005). After all, it isn’t only individuals who make decisions. It can be teams, crowds or whole societies. Enabling organizations to make better collective decisions may be the difference between success and failure in the Knowledge Era.
Documents used in the preparation of this TrendWatcher include the following:
Jacobs, Peter. “Put the Right Decisions in the Right Hands.” Harvard Management Update, May 2005, pp. 6–7.
Leonard, Nancy H., Laura L. Beauvais and Richard W. Scholl. “A Multi-Level Model of Group Cognitive Style in Strategic Decision Making.” Journal of Managerial Issues, Spring 2005, pp. 119–138.
Miller, C. Chet, and R. Duane Ireland. “Intuition in Strategic Decision Making: Friend or Foe in the Fast-Paced 21st Century?” Academy of Management Executive 19, no. 1, 2005, pp. 19–30.
Pearlman, Ellen. “Robert I. Sutton: Making a Case for Evidence-Based Management.” CIO Insight, February 6, 2006.
Pfeffer, Jeffrey, and Robert I. Sutton. “Why Managing by Facts Works.” strategy+business, Spring 2006, pp. 9–12.
Ross, Philip E. “The Expert Mind.” Scientific American.com, July 24, 2006.