Ten worst business decisions

MAKING decisions is like making love: tricky to do the first time, fun and fulfilling but not something to get overconfident about. Sadly, business tycoons are not renowned for their humility, and their mistakes can cause disaster. One of the biggest challenges is avoiding the pitfalls of decision-making.

Sometimes the fault lies not in the process but in the mind of the decision-maker, so-called 'thinking flaws'. These include anchoring, where we give disproportionate weight to the first piece of information received, and hindsight bias, which leads us to give undue weight to a recent (possibly dramatic) event. The status quo trap biases us toward maintaining the current situation, even when better alternatives exist. The mistakes of the past are perpetuated by sunk-cost thinking ('We have invested so much that we cannot alter course now'). Confirmation bias is when we seek information to support an existing view and discount opposing information. The overconfidence trap appears when someone has exaggerated their ability to understand situations.

Framing happens when an issue is incorrectly stated, undermining the decision-making process. The prudence trap leads us to be overcautious about uncertain factors, reflecting a fear of failure and risk aversion. Bolstering is an uncritical emphasis on one option. Finally, shifting responsibility is another way of coping with difficult decisions and is often a sign of weak leadership.

The worst business decisions are memorable because of their consequences, the ease with which disaster could have been avoided and the tendency for mistake to pile on mistake. These aren't accidents or unfortunate incidents but premeditated decisions that resulted in disaster.

IBM

One of the worst decisions occurred when IBM ceded dominance of the software market to Microsoft for $80,000, paying Bill Gates a fee for his operating system and failing to tie him sufficiently to their firm. IBM did not appreciate the potential value of the software market, and were overconfident that they could dominate the hardware market.

Gates realised that if Microsoft's operating system was linked with IBM, it would become the industry standard, with the opportunity to sell compatible software to IBM clones. He was right, with stunning results for Microsoft. The lessons for IBM are clear. Never buy in haste and always think of the future. Decisions set precedents and have consequences.

TIME WARNER/AOL

Time Warner's merger with AOL was the high-water mark of hype exceeding reality during the dot com boom. The belief was that internet channels and content would combine to create a profit-making machine. Not so. Visions of the future, market share, cost reduction and shareholder value are all welcome, but what matters most is adding value for the customer.

The lessons? Understand the forces that affect markets. Guesstimates are inadequate; understand why situations are

developing and where that change might lead.

GEC/MARCONI

GEC decided to buy Marconi, rebrand the business as a telecoms company and buy telecoms-related businesses. This landed the company with huge debt. Its decisions, piling mistake on mistake, were based on a belief that the future core business lay in telecoms. All of the thinking flaws can be seen here: sunkcost thinking, hindsight bias, the overconfidence trap and others conspired to send the share price through the floor.

THE RUSH FOR 3G

Another flawed decision was that of telecoms companies to rush to buy newgeneration telephone licences. With the companies caught between a slowing, maturing market for mobile telephones and pressures to keep revenues and share prices rising, the result was a belief that technology was the solution. If the solution is technology, it will be expensive and you need to get there first. The telecoms industry marched into debt with massive hype and expectation that customers would embrace new 3G technology. The lessons are: first, plan decisions carefully, understanding all elements. Second, recognise technology is only a panacea if customers want it. Third, think long and hard about purchase decisions, and never pay more than you can afford.

ITV DIGITAL

ITV Digital turned out to be a pale imitation of established competitors. The strategy was late and had already been exploited by BSkyB. Worse still, the 'me too' product was weak. One clear lesson is that product decisions need to deliver genuine value for customers.

DOT COM BOOM

Thousands of flawed decisions were made during the dot com boom. Issues that would normally affect commercial decisions were overwhelmed by a belief that virtually anything would find a profitable market online. The lessons are clear: common sense matters, don't be afraid to test assumptions and don't be seduced by hype, technology or the promise of the new.

MARKS & SPENCER

Marks & Spencer's decision not to advertise or even to appoint a marketing director came to characterise its arrogance, complacency, inflexibility and lack of market focus. It was a shocking decision, thankfully now corrected. For years, the firm believed that its culture was geared to the customer. This may have been true for a while, but it could not last forever. The lessons? Avoid complacency, dare to be different and recognise the inevitable: if it ain't broke, then perhaps it should be.

NEW COKE

Coca-Cola discovered it was losing out to rival Pepsi so it introduced New Coke. Unfortunately, millions of Americans decided they hated New Coke and responded to the change in formula as if the organisation had killed off a beloved member of the family. The lessons from Coke's mistake are avoid basing decisions on biased research, stay close to customers and know what makes you or your product special.

REBRANDING

The rebranding gaffe has been made by PricewaterhouseCoopers, which renamed its consulting business Monday, and Andersen Consulting, which switched to Accenture. These choices reinforced perceptions of consultants as lacking substance. Other examples are British Airways, when under Robert Ayling, rebranding its fleet with ethnic designs and Royal Mail plumping for Consignia. If an option seems too clever to be true, it probably is. Try to see things from others' viewpoints.

ENRON

Enron's decision to resort to financial chicanery and fraud highlights the fact that for decisions to work well, they need to inspire trust. By deciding to go for an illegal, unethical solution to the pressures of rising shareholder expectations, senior executives lost everything. The decisions that work best are honest and compelling. They engage people and gather their own momentum.

Of course, many great decisions are made every day. While executives should accept that decisions could always be better, what matters is that they make progress, achieve their objectives - and avoid disaster.

Business Strategy: A Guide to Effective Decision Making by Jeremy Kourdi is published by Profile Books at £20. To order your copy at £15 inc p&p, call the Evening Standard Bookshop on 0870 191 9919.

How to get it right: be both rational and intuitive

SO, are there rules when making decisions? The short answer is yes, but you need to discover them yourself. Decision-making has a personal element. Each of us differs in the way we evaluate situations, bring our experience to bear, manage risk, cope with detail and handle other aspects of decisions. So, be clear about what you do well and where you could improve.

Some tips: 1. Don't put off decisions. Decide what to do, even if it is to wait and see. 2. Follow the decision-making process. Assess the situation, define critical issues, specify the decision, make the decision, implement and then monitor the results, make adjustments as events unfold.

3. Remember to trust your gut feelings; decision-making is both rational and intuitive. 4 Do not rely on previously successful decisions or ideas. Times change, so must your thinking. Also, be consistent and determined, and involve other people.