how to make a billion dollar mistake. in an ideal world our decision process looks something like...

How to Make a Billion Dollar Mistake

In an ideal world our decision process looks something like this

• We encounter a choice

• We analyze our options

• We make a choice

• We revisit our decision if our choice doesn’t work out

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The majority of our decisions look more like this

• We encounter a choice

• We consider a single option

• We become emotionally attached to that option

• We choose that option

• We neglect to define criteria that would trigger a timely re-evaluation if our decision doesn’t work out

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Quaker’s acquisition of Snapple is a case in point

On the surface, the Snapple opportunity looked familiar

5Decisive, by Chip Heath and Dan Heath, Crown Business Press 2013

Below the surface, the similarities were harder to find

• Snapple’s teas and juices demanded very different approaches to manufacturing and distribution

• The brand’s quirky, underdog image was not a natural fit for a mass market player like Quaker

• A proliferation of new competitors threatened Snapple’s dominance

• The purchase price was considered by many analysts to be as much as a billion dollars too high

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The outcome

• Snapple’s sales didn’t take off the way that Gatorade’s had

• The debt burden threatened to force the company into bankruptcy

• Snapple was hurriedly sold for $300 million

• Smithburg stepped down as CEO

• Snapple acquisition has become known as one of the worst decisions in business history

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Smithburg’s mistakes

• He only considered a single option

A. Buy Snapple

B. Don’t buy Snapple. Keep the $1.8 billion for other purchases

• He didn’t assign anyone in his company to argue against the acquisition

• The Snapple decision was really a “yes or yes” choice

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So how can we avoid a billion dollar mistake?

First, by always considering multiple options

• Decision research confirms that only 29% of managers consider more than one alternative when they encounter a choice

• 30% of teenagers consider more than one alternative when they encounter a choice

• “Whether or not” decisions failed 52% of the time over the long term versus only 32% of the time for decisions with two or more alternatives


Eisenhower leveraged his re-framing skills to shift America’s spending habits after WWII

• The cost of one modern heavy bomber =

• A modern brick school in 30 cities

• 2 electric power plants serving towns of 60K

• 2 fully equipped hospitals

• 50 miles of concrete highway

• A half million bushels of wheat


But what if you can’t seem to find other alternatives?

• Borrow from someone who’s already solved your problem

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Second, avoid becoming attached to one of your options

• Two things happen when we begin rooting for an option to win

1. We selectively hunt for information that confirms our initial hypothesis (confirmation bias)

2. We become averse to losing options that we have put our support behind (Loss aversion)


To avoid these biases, the Catholic Church appointed a Promotor Fidei

• The promotor fidei was created to challenge the qualifications of candidates who were nominated for sainthood

• These “promoters of the faith” served as devil’s advocates and their criticism was considered a noble function

• They had such deep respect for the church that they were willing to accept this stressful role in order to maintain its integrity


But while devil’s advocates can help you avoid billion dollar mistakes..


• They won’t help you resolve an impasse

To do this, other techniques are required


• What would need to be true for this option to be the right answer?

• By the end of the day the groups agreed on what had to be true for each of the options to be the best choice

• By the time the group reconvened for the next board meeting with all information in hand, there was unanimous agreement

Roger MartinDean, Rotman SOM

Third, assume you’re making the wrong choice

• Zappos has earned a reputation for exceptional customer service

• Given the critical role of attitude in successful service, their assessment of fit is a central consideration in hiring

• So after a rigorous interview process, Zappos adds one additional filter

• One week into its four-week, new hire training program, Zappos offers new hires $4,000 to leave the company if they feel that Zappos may not be the right place for them


Summary

• Billion dollar mistakes are easier to make than you think

• Consider a single option, get emotionally attached to it and assume you’re going to be right

• The first step to better decision making is to always consider multiple options

• Next, treat each option more like an acquaintance than a friend

• Finally, assume that you’re going to be wrong

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how to make a billion dollar mistake. in an ideal world our decision process looks something like...

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