When you're first thinking through an idea , it's important not to get bogged down in complexity. Thinking simply and clearly is hard to do. Richard Branson, Founder of Virgin Group (400 + companies including Virgin America, Virgin Atlantic Airways, Virgin Cola, Virgin Galactic, Virgin Media, Virgin Mobile, Virgin Money, and Virgin Records)
As we examine decision making, and specifically strategic decision making, we'll explore the term in an entrepreneurial context. We'll continue our discussion of Amazon, and the elements that motivated them to select the product categories that they began with. We'll also introduce the concept of cognition, and connect cognition to the entrepreneurial process.
Decisions typically share a similar path. We recognize a problem. We generate alternatives. We evaluate those alternatives. Then, we select the alternatives that best satisfies our evaluation criteria. This is true for many different types of decisions, including major personal decisions such as buying a home or an automobile. Strategic professional decisions include career changes. Entrepreneruail decisions include what to launch, if to launch, and how to launch our venture.
In the beginning of the venture, nearly all decisons are strategic: when you're evaluating the idea, when you're thinking about he concept, when you're developing the prototype, when you're testing that with customers, and when you're considering if you need to raise funding.
Before bringing your product to market, strategic decisions include:
- Who should be your co-founders?
- What should you focus on in your marketing plan?
- How do you build the product?
- Where do you build it?
- What do you spend on building it?
What was Amazon.com's first strategic decision?
As an example of entrepreneurial strategic decision making, consider the ideal product to sell online in 1994. The answer would be quite different than what it would be today.
In 2015, we have decades of experience and research on online sales. We have millions of articles, reports, magazines, case studies, and books on online sales. There are even movies based on entrepreneurial success stories for online businesses, to include The Social Network in 2010, adapted from Ben Mezrich's 2009 book The Accidental Billionaires: The founding of Facebook.
1994, at the birth of online retailing, research materials were very scarce. There were general business principles that made sense, such as thinking strategically about what could I sell online, and that online retailing presented possible advantages to bricks and mortar retailing. There was a question of convenience. Was it something that customers needed inmediately? Was shipping affordable for certain product types? Could customers envision the product without seeing it in person?
There are other factors in the mid-1990s that made the Internet different than it is now. Security is one. If I've never bought anything online, am I willing to enter my credit card information online? Am I willing to buy things from companies I've never heard of? And what's the consequence of that? As a consumer, am I willing to risk $10? $100? When we look at these considerations, we ask, what's the ideal product to sell online?
For amazon, it was books first and music second. Specifically, printed books and CDs made sense. We'll talk about why they made sense.
One element was the competition in books and music retailing, which was characterized by a large, fragmented market. There were the mall retailers like Waldenbooks, B. Dalton, Crown Books, Sam Goody, Musicland, Suncoast and others in the U.S. But with no majors players, competition was widely distributed.
Books and music were also attractive online products to retail because you knew exactly what you were getting when you ordered a certain title online. We did not need to try it on or taste it. It wasn't a customer electronic device that you wanted to see working in the store, or see the quality of the picture before we bought a television. We knew that if a book was from a certain author and a certain title, a CD was of a certain album from a certain artist, it would be exactly what we expected.
Searching was very easy to do as well, Books and music did not come in multiple sizes, multiple widths, and multiple colors. As consumers, we could easily search and find what we were looking with books and music.
Books and music brought large market opportunities for Amazon. What this means is that millions of Americans read books, and many more listened to music.
There was an element of product branding that Amazon was able to leverage and integrate. Even though people did not know what Amzaon was then, they knew the books that they loved and the music they loved. They knew John Grisham, Tom Clancey, Stephen King, Madonna, and Michael Jackson.
By bypassing the bricks-and mortar expenses, there was a cost advanatge. Amazon saved retail space cost and associated labor cost. They could share those savings with customers.
Shipping costs for books and music was inexpensive.
Books and music made a lot of sense as an online purchase in the mid-1990s.
Even with these advantages, if you've studied Amazon, you know that it took until 2003 to achieve profitability. They built tremendous market share and an incredible brand along the way.
But they didn't stop there.
The books and the music of the 1990s was where they started. They've done infinitely more things since then, particularly in the digital space, as we'll discuss. Remember that it started with a very strategic decision of doing one simple thing well, selling books online.
Books and music were also attractive online products to retail because you knew exactly what you were getting when you ordered a certain title online. We did not need to try it on or taste it. It wasn't a customer electronic device that you wanted to see working in the store, or see the quality of the picture before we bought a television. We knew that if a book was from a certain author and a certain title, a CD was of a certain album from a certain artist, it would be exactly what we expected.
Searching was very easy to do as well, Books and music did not come in multiple sizes, multiple widths, and multiple colors. As consumers, we could easily search and find what we were looking with books and music.
Books and music brought large market opportunities for Amazon. What this means is that millions of Americans read books, and many more listened to music.
There was an element of product branding that Amazon was able to leverage and integrate. Even though people did not know what Amzaon was then, they knew the books that they loved and the music they loved. They knew John Grisham, Tom Clancey, Stephen King, Madonna, and Michael Jackson.
By bypassing the bricks-and mortar expenses, there was a cost advanatge. Amazon saved retail space cost and associated labor cost. They could share those savings with customers.
Shipping costs for books and music was inexpensive.
Books and music made a lot of sense as an online purchase in the mid-1990s.
Even with these advantages, if you've studied Amazon, you know that it took until 2003 to achieve profitability. They built tremendous market share and an incredible brand along the way.
But they didn't stop there.
The books and the music of the 1990s was where they started. They've done infinitely more things since then, particularly in the digital space, as we'll discuss. Remember that it started with a very strategic decision of doing one simple thing well, selling books online.
What are the characteristcs of strategic decisions?
When we discuss strategic decisions, there are four fundamental characteristics to consider. These are:
- Complexity - What really makes a decision strategic is that it's complex. There are lots of facts, variables, and alternative choices. There's not an easy answer.
- Uncertainty - We don´t know the eventual outcome. We can anticipate and plan and forecast, but we're not sure. So, there is an element of the unknown.
- Rationality - There are limits of rationality to consider. What are our goals? What are our objectives?
- Control - We can control, or at least influence, some factors, albeit not all. In this way, when we think about strategic decisions, these four characteristics come into play.
Why is decision making a cognitive process?
For our purposes, we can think of cognition and thinking as synonyms. Entrepreneurs ask, "What are my resources? What's a course of action that I'd like to pursue? What are the results that I desire? What do I do as things change?".
As entrepreneurs, we always have choices. There are multiple alternatives at every stage. There is the option of not doing anything and waiting to see what happens. There's an element of choice that is implied with decision making.
Decision making is a strategic activity. As an entrepreneur, you will need to set your revenue goals and your profit goals, and create your marketing plans and hiring strategies. Every strategic decision is influenced by your own comfort level with the risk involved with that decision. Your personal Mindset, motivations, and behaviours guide your decision making.
Strategic decisions demand critical analysis. They involve consideration of required resources and commitment levels, and expected risks and rewards.
Jeff Bezos, the founder of Amazon, introduced an incredible and lasting phenomenon with his company. Granted, it's easy to look at entrepreneurs after they have had success, and hear them tell you how right they were, how they made all the right decisions, and how they have had this wonderful success. It's rare to be able to look at entrepreneurs who are successful before they became successful.
To see them fifteen or twenty years prior, when they were just beginning to build their success. What their decision making and thought processes were then, and what they expected to happen. And in that way, we have the benefit of understanding the future and knowing the future. We see what happened according to plan, and see what was modified, or adapted. Historic video interviews and articles can provide us with this retrospective lens, and we see that Jeff Bezos was an innovative, prophetic thinker from the start.
I invite you to view "The Jeff Bezos of 1999: Nerd of the Amazon" on the CBS News website. This video is available at: CBS News
Why study strategic decision making?
We all need to be better entrepreneurial decision makers. Through this book, we can understand what's different about the decision making of entrepreneurs versus typical managers. We also want to learn how to make more efficient and effective decisions with reasonable resource commitments and relative speed.
The environment of entrepreneurs is uniquely challenging. Entrepreneurs are, or at least should be, doing new things. They may not have all the resources and relationships of established companies. There are higher levels of uncertainty and complexity, and greater levels of consequences from failure. If you're a large firm, and you spend a million dollars for an undesirable outcome, that's probably recoverable. The consequences for entrepreneurs are more significant. As an entrepreneur, misspending several thousand dollars may result in the end of your company. Entrepreneurs are under more stress in making decisions.
Through effective decision making we can improve our clarity and focus. We can make better decisions, even with limited information. We can accept higher levels of risk that involve major consequences.
Many strategic decisions need to be made, and many considerations need to be taken into effect. Those decision-making elements are mental processes. They are cognitive processes as you look at opportunities, and think about skills and abilities, and how to navigate them. We will address:
Why study strategic decision making?
We all need to be better entrepreneurial decision makers. Through this book, we can understand what's different about the decision making of entrepreneurs versus typical managers. We also want to learn how to make more efficient and effective decisions with reasonable resource commitments and relative speed.
The environment of entrepreneurs is uniquely challenging. Entrepreneurs are, or at least should be, doing new things. They may not have all the resources and relationships of established companies. There are higher levels of uncertainty and complexity, and greater levels of consequences from failure. If you're a large firm, and you spend a million dollars for an undesirable outcome, that's probably recoverable. The consequences for entrepreneurs are more significant. As an entrepreneur, misspending several thousand dollars may result in the end of your company. Entrepreneurs are under more stress in making decisions.
Through effective decision making we can improve our clarity and focus. We can make better decisions, even with limited information. We can accept higher levels of risk that involve major consequences.
Many strategic decisions need to be made, and many considerations need to be taken into effect. Those decision-making elements are mental processes. They are cognitive processes as you look at opportunities, and think about skills and abilities, and how to navigate them. We will address:
- Studying the psychological traits of entrepreneurs, and discussing how you can enhance these within yourself;
- Examining the opportunity discovery aspects of how to recognize and develop new ideas;
- Exploring the cognitive aspects of decision making, and really think about the thinking that goes in entrepreneurship; and
- Developing the analytical skills to evaluate and select opportunities.
Entrepreneurs make significant decisions in dynamic and uncertain environments. There are tools and techniques to facilitate making these decisions. My goal is to help you anticipate, analyze and make better decisions in your entrepreneurial pursuits.
In summary, strategic decision making is certainly something that we're familiar with, whether we've called it that or not. We do it with frequency, professionally and personally. It's something that we need to better understand. And it's something that we can improve upon individually.
We also want to recognize that we can learn form others. We can learn from other entrepreneurs. We can learn from other successful companies and startups, and what they did for better and for worse, in the creation and growth of their ventures. We recognize that studying decision making is helpful to being better entrepreneurial decision makers and better entrepreneurs.
What is your decision-making style?
In the study of entrepreneurial decision making, it's very helpful to understand and recognize your personal decision-making style. In this book, we'll talk about how you can understand your personal preferences for decision making, and what you may do to enhance your decision-making style.
We will begin with a discussion on rationality. The rational decision maker is data driven. They make decisions based on logical analysis. They don't rely on their gut, or would prefer not to, particularly if it contradicts what they're finding in the facts.
Separate from rationality is intuition, of making decisions based on feelings and emotions. You may, in this case, avoid the facts. -you may avoid the logical analysis if it contrasts with what your gut tells you.
When you ponder these two styles, consider whether you are rational or intuitive when it comes to significant decisions.
When you think about rational versus intuitive, I encourage you to put them into context and to think about past actions. Think about a career choice, a significant purchase, or your personal relationships. Were you rational or intuitive there? That's probably a good indicator of your preferred style, when you look at it historically and what you've done and why you've done it, and what role the rational or the intuitive played in that.
Are successful entrepreneurs rational or intuitive decision makers?
The short answer is "both". What we see with successful entrepreneurs is that most are rational and intuitive decision makers. In that way, when we look at the various elements of the startup venture, you can work to be rational, but you're never going to have all the data. You're never going to have all the facts or answers of what to do. Inversely, you're not always operating in the dark. You're not always operating without information and without resources. So, you don't have to be entirely intuitive about everything. The challenge is that you have to recognize where you are, or where your preferences tend to be, and what you can do to augment that, and to raise your competency in both.
You can make decisions that are highly rational and highly intuitive. We'll talk about those in a few different contexts.
Concept development is certainly one; it should involve market research and a lot of gut feelings as well. It's that early ideation phase of what is the product? What's the benefit that you want to bring forth? It takes a lot of intuition.
Soon after that, there's the element of market analysis. Does anybody care? Is there a customer out there? Is it competitive with what's already in the market? And that's where we can integrate our analytical efforts.
You also need to understand where the market is headed, where your competitors are headed. And that takes you back to intuition. What do you think the feature set of your competitor is going to be six months form now?
We also want to recognize that customer discovery requires rational and intuitive decision making. Customers are difficult to understand, and their needs and wants change over time. There's the expectation that you're going to do research. But you're also going to do your own customer discovery and analysis, and apply your intuition.
Product design and prototyping requires vision and quantitative data. Communicate with team members, advisors, and other people who can challenge your thoughts, who can make suggestions, and who can help you evolve your ideas to better understand what your product should be. You also want to recognize the value of generating alternatives, of testing assumptions, gathering data, understanding what works and what doesn't work, and why people prefer certain things. Will they pay for that feature? And what will they pay?
You're always integrating the rational and the intuitive. Keep asking yourself, what information is missing? What can I add?
Fundraising tends to be quantitative. Investors ask, what are your revenues and expenses? How much funding do you need to raise, at what point, at what time, on what terms, and at what valuation? You cannot go to an investor with only your gut feeling. Nor should you do it to yourself. Fundraising is very numbers driven. But thre's always a degree of intuition that's factored into how you do your estimates, what your expectations are, what your key assumptions are.
In summary, when we look at these elements of decision-making style, remember that entrepreneurs need to make relatively quick decisions with high skates, and with incomplete information, in a dynamic market.
This isn't simply an exercise of "I am this way" or "I am that way". It's a journey of recognizing who you are, and what's your roadmap to enhancing those elements, and what you can do to improve your decision making and thereby improve improve your entrepreneurial success.
When you ponder these two styles, consider whether you are rational or intuitive when it comes to significant decisions.
When you think about rational versus intuitive, I encourage you to put them into context and to think about past actions. Think about a career choice, a significant purchase, or your personal relationships. Were you rational or intuitive there? That's probably a good indicator of your preferred style, when you look at it historically and what you've done and why you've done it, and what role the rational or the intuitive played in that.
Are successful entrepreneurs rational or intuitive decision makers?
The short answer is "both". What we see with successful entrepreneurs is that most are rational and intuitive decision makers. In that way, when we look at the various elements of the startup venture, you can work to be rational, but you're never going to have all the data. You're never going to have all the facts or answers of what to do. Inversely, you're not always operating in the dark. You're not always operating without information and without resources. So, you don't have to be entirely intuitive about everything. The challenge is that you have to recognize where you are, or where your preferences tend to be, and what you can do to augment that, and to raise your competency in both.
You can make decisions that are highly rational and highly intuitive. We'll talk about those in a few different contexts.
Concept development is certainly one; it should involve market research and a lot of gut feelings as well. It's that early ideation phase of what is the product? What's the benefit that you want to bring forth? It takes a lot of intuition.
Soon after that, there's the element of market analysis. Does anybody care? Is there a customer out there? Is it competitive with what's already in the market? And that's where we can integrate our analytical efforts.
You also need to understand where the market is headed, where your competitors are headed. And that takes you back to intuition. What do you think the feature set of your competitor is going to be six months form now?
We also want to recognize that customer discovery requires rational and intuitive decision making. Customers are difficult to understand, and their needs and wants change over time. There's the expectation that you're going to do research. But you're also going to do your own customer discovery and analysis, and apply your intuition.
Product design and prototyping requires vision and quantitative data. Communicate with team members, advisors, and other people who can challenge your thoughts, who can make suggestions, and who can help you evolve your ideas to better understand what your product should be. You also want to recognize the value of generating alternatives, of testing assumptions, gathering data, understanding what works and what doesn't work, and why people prefer certain things. Will they pay for that feature? And what will they pay?
You're always integrating the rational and the intuitive. Keep asking yourself, what information is missing? What can I add?
Fundraising tends to be quantitative. Investors ask, what are your revenues and expenses? How much funding do you need to raise, at what point, at what time, on what terms, and at what valuation? You cannot go to an investor with only your gut feeling. Nor should you do it to yourself. Fundraising is very numbers driven. But thre's always a degree of intuition that's factored into how you do your estimates, what your expectations are, what your key assumptions are.
In summary, when we look at these elements of decision-making style, remember that entrepreneurs need to make relatively quick decisions with high skates, and with incomplete information, in a dynamic market.
This isn't simply an exercise of "I am this way" or "I am that way". It's a journey of recognizing who you are, and what's your roadmap to enhancing those elements, and what you can do to improve your decision making and thereby improve improve your entrepreneurial success.
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