Discounted Cash Flow and Decision Modelling Course

My friend and colleague, Dave Holland is part of a team presenting this course in South Africa in August 2015. I highly recommend it if you have interest in the subject.

Economist Unit

Economist Unit

It is designed to provide equity analysts as well members of strategy and finance teams within corporations and parastatals with a highly practical experience in understanding the core principles of corporate valuation, building a DCF valuation model and incorporating elements of decision analysis in this process.

Course details can be found at: DCF & DM Course and details of the course presenters below.

Please note: if you are interested in strategic decision-making but believe this course may be a little on the technical side, Genesis have a special offer on their Strategic Decision Pack. For £9.99 (normal price £40-00) you can buy our best practice  framework to help you and your team make better decisions.

Genesis Strategic Decision Pack

The course presenters:
David Holland is a Senior Advisor to Credit Suisse and independent consultant based in Cape Town, South Africa. Until 2011, he was a Managing Director at Credit Suisse in London in charge of HOLT Valuation and Analytics, the research and development arm of Credit Suisse HOLT. He was responsible for improvements to the cash flow return on investment (CFROI) framework and other Credit Suisse valuation models, the development of custom solutions and investment products based on HOLT’s intellectual property and the generation of HOLT content for fund managers.

Warwick Blyth is a strategy consultant and EMEA Energy Practice Leader for Strategic Decisions Group (SDG). He has 20 years global consulting experience with a particular focus on the Energy sector. He has built decision and valuation models for many clients in an extensive range of industries and strategic situations and has an M.S. in Management Science and Engineering from Stanford University. SDG is a US-based boutique strategy consulting firm and world leader in helping clients improve the quality of their decision making through structured processes and rigorous modelling.

Drucker: The Effective Decision

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The effective decision
– synopsis of an article by Peter F. Drucker.

This is definitely worth re-publishing …. a classic  read.

NOTE: best practice process and tools available here

Best Practice Decision Making

While browsing through the B School library the other day, I happened across an article on decision making by Peter Drucker, originally written in 1967. Naturally as this is our business I was curious to see what one of the true masters of management had to say on the topic. Here is the synopsis together with our commentary.

Drucker commences by stating that an effective decision making process must go through some basic steps. These steps will not “make” the decision – it will always be a judgement call – but if the steps are ignored, the decision is not likely to be effective nor right. The 6 steps he recommends are:

  1. The classification of the problem
  2. The definition of the problem
  3. The specifications which the solution to the problem must satisfy (the “boundary conditions”).
  4. The decision as to what is “right”, rather than what is acceptable, in order to meet the boundary conditions
  5. The building into the decision of the action to carry it out.
  6. The feedback which tests the validity of the decision against the actual course of events.

We will show how these steps fit into the overall Genesis Decision Making framework a little later, but first a brief description of the steps and why they are important.

 

Step 1: Problem classification
Drucker postulates that a decision falls into 2 broad categories: generic (where the situation has happened before and a set of rules or principals may be applied) or unique (must be treated individually and pragmatically). There is a further categorisation of (a) generic although unique to the organisation and (b) generic, although only the first event of a new trend or genus. Both the latter appear to be unique but are not truly so. He states that if the problem is incorrectly classified at this stage, then the decision will inevitably go wrong.

 

Drucker Decision Step 2Step 2: Problem definition.
Here the decision maker must work out what the situation is all about and what are the key issues. The danger, he claims, is that of an incomplete definition but one that is plausible. The only safeguard being to check the definition again and again against all the observable facts and throw out the definition the moment it fails to encompass them. That is, doing what we now call, seeking dis-confirmatory evidence as well as confirmatory evidence. Although much has recently been written about this under the title of behavioral economics, he reminds us  that these are simply the rules of scientific observation first formulated by Aristotle and then reaffirmed by Galileo.

 

Drucker decision step 3Step 3: The specifications (“boundary conditions”)
It must be clearly defined what the decision must accomplish, that is what are the minimum goals it has to attain. In science, these are known as boundary conditions. Drucker says that a common problem in decision making is not necessarily the wrong decision, but a circumstance when the boundary conditions change while the decision is being implemented – such as may have happened to organisations who started a decision process pre-recession and are now trying to implement it in the midst of the economic crisis.
He also states that another reason to have boundary conditions clearly defined is in when one is making the most dangerous of all decisions – which is when the conditions are essentially incompatible. That is when the decision might, if nothing goes wrong, work. This is what he calls little more than “gambling”.

 

Drucker decision step 4Step 4: The decision: what is right
It is critical to decide what is right. That is not to say that a compromise may not eventually have to be made when implementing (inevitably it will), but rather start with the best decision that meets all the boundary conditions and  then, if necessary, compromise from that position. Drucker brilliantly demonstrates this by explaining there are two types of compromise. One is expressed in the proverb: “Half a loaf is better than no bread”. The other in the story of the Judgement of Solomon where it is realised that “half a baby is worse than no baby at all”! In a nutshell, he is saying that we should not be thinking about “what will be acceptable” to others (at least initially), rather “what is the right answer?”.

 

Drucker decision step 5Step 5: Converting the decision into action.
Drucker says that a decision is not a decision until it has been acted upon. He goes further to state that the action should be built into the decision from the outset. He suggests 4 distinct questions:
  • Who has to know of the decision?
  • What action has to be taken?
  • Who is to take it?
  • What has to be done so that these people can take the action?
He notes that the first and last questions are most frequently overlooked and then reminds the reader that the action must be appropriate to the capacities of the people who have to carry it out.

 

Drucker decision step 6Step 6: Feedback
Drucker reinforces that men are fallible and decisions can go wrong and may not achieve their desired results. Therefore a feedback mechanism must be put in place to monitor and report back on the success or otherwise of the outcome. He says that effective decision makers realise that often they should not rely on reports but, like military commanders, must go into the field themselves to see how the decision is being carried out. Peter Drucker, with accurate foresight (remember this was written in 1967) warns that with the advent of computers this is even more important as computer-generated reports only can report back on abstractions. A final comment in this section is “Failure to go out and look is the typical reason for persisting in a course of action long after it has ceased to be appropriate or even rational.”

 

In more recent years, Genesis Management Consulting has constructed their own proprietary strategic decision making framework that incorporates all of Drucker’s steps within a slightly larger and more detailed framework. Although Drucker does not mention all of the steps in the Genesis framework specifically, we have little doubt that he would recognise them all as being valid and a valuable complement to his own original work. The Genesis framework is shown below:
Genesis Decision Framework(Note: this decision framework together with detail on each of the steps is available to purchase at
The Decision Shop for a nominal cost)

 

Drucker and GenesisThe way in which Drucker’s steps overlap with the Genesis Decision Framework can best be shown in the diagram to the right where the initial three steps fall into the decision structuring; the fourth step under evaluation and the fifth and sixth steps under decision and implementation.

 

Drucker’s original article is available for purchase from the Harvard Business Review library and is worth reading as it contains a little more detail and some examples of the  steps and the pitfalls. Warning, it is written in a somewhat old-fashioned way and does not make for easy-reading – but it is probably worth the effort.

 

You will also find other articles of interest within this blog and the insightful and popular series: “The 7 habits of Highly effective Decision Makers” is available for free download at our web-site. Finally, I would like to recommend the 48 page document that lays out The Genesis Framework and details of all the steps. It is part of the strategic decision making module offered at IE Business School and a number of other Business Schools around the world and available at The Decision Shop.

 

To leave you with a quote from Lewis Carroll and referenced in Druckers original article:

 

“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 other way.”
“It’s too late to correct it,” said the Red Queen:
“When you’ve once said a thing, that fixes it, and you must take the consequences.”
Through the Looking Glass

Global Risks: World Economic Forum: 2014

World Economic Forum Global Risks 2014

It is time for Davos again and the WEF have just released their latest global risk report. As always, it is an exceptionally well-written and well-thought through report – and I personally feel privileged to have access to research of this quality. This post is not intended to replicate or summarise the report, rather to encourage readership by mentioning a few highlights. Also to suggest some ways that you may use this in your own organisation.

If you were to skim-read the report I would suggest start with the executive summary and then the early section on inter-relatedness of the risks. The strong message coming through is the potential for events in one area to catalyse or reinforce events in other areas – and this is incredibly hard to predict and defend against.

Global Risks Chart WEF 2014

Global Risks Chart WEF 2014

The main chart showing all the risks and their impact and likelihood forms the basis of the research. A copy is shown to the left of this text where the major risks in terms of impact and likelihood are revealed in the top right-hand quadrant.

Later in the report, there are two charts showing differences in perceptions between younger and older respondents;and male and female respondents is fascinating.

 

A little later the diagram showing the interdependency emphasises the need for a global response to these risks to reduce the potential for the “tragedy of the commons” taking place.

There is much more in the “blue-boxes” as well as some of the clusters of interdependencies that are reviewed in the part 2.

In terms of using this in your own business, I would suggest a getaway for your executive team where these are reviewed and consideration given to the potential impact of the major (high ranked impact-likelihood) risks on your strategy and business. If you are operating in one or a few regions only, you might also consider the more local risks you are facing  in conjunction with the global ones. It is particularly important to consider both the opportunities that might be created as well as the downsides.

You can find the report at: WEF Global  Risks Report 2014

Contact me at sgifford@genesis-esp.com to discuss how we might facilitate a strategic risk session with your management team. I promise for an entertaining, interactive and visually powerful event!

 

 

 

 

Time to scrap those special projects?

Interestingly, on the same day I came across two articles with a similar message: “scrapping ongoing projects is one of the toughest decisions to take – even when we know they are no longer aligned with our direction and strategy”

Extreme example: Iridium phone – idea scrapped after billions of dollars spent

The one article came from the Financial Times and was called “Killing projects is the hardest innovation” and the other came out of the introduction to Bain’s Decision Insight series called “Decisions during change“. It is particularly relevant to us here at Genesis as we hold conversations around our “Brave New World” campaign. Here we are talking to our clients about how their world has probably fundamentally changed since the recent economic and social turmoil – and they can no longer simply afford to continue along the old track. Well, at least without checking if it is still going where they want it to take them!

Path to nowhere

Within this context, we are advising that strategic objectives are changed or at least refreshed – and that ALL projects underway or reviewed to see if they still fit within the new strategy.

Although often there is a clear need to scrap them or at least change them dramatically – the resistance to do so is immense.

The CEO hears many reasons why the projects must stay in place:
“Lets just get to the next milestone and review it again at that stage.”
“We could change the direction somewhat and it might be a better fit with what we are trying to achieve”
And our favorite: “but we have invested so much in this already … ”

The trouble is as long as useless or suboptimal projects continue, the less resources we have to invest in the new more critical ones. So we advocate a robust process that includes:

  • Review context and strategy
  • Refresh / change strategic objectives (maximum five, so you cannot simply add more to what you already have)
  • Make an inventory of all (yes, ALL) projects underway and map them back to strategic objectives and to each other.
  • Put each one through a clear assessment and decision process to decide what to drop
    • Note: none of the decision objectives includes consideration of sunk costs – only future costs
  • Develop a new set of initiatives aimed at achieving your new objectives – with appropriate prioritization and resource allocation.

Playing the devils advocate

Put like this, it sounds really straightforward. But there are underlying behaviors that hinder the process. These include: project ownership, knock to pride in reversing a previous decision, sunk cost fallacy, reputations attached to projects, – to name but a few. This makes the simple process very hard to implement. This is a compelling reason to get some independent facilitation and support to make it happen. This could include facilitating (and adding to) the strategic review, identifying and listing the projects, setting up the decision process and helping you drive through to implementation. But as important, being that external voice that challenges some of the reasons given as to why projects should continue.

Project spring-clean

So – perhaps it is time for your “project spring-clean” and focus on new strategic initiatives better aimed at your changed business environment. You will find the process refreshing and it could invigorate your team as well.

 

Mail me at sgifford@genesis-esp.com if you would like to discuss how we might assist you in this process.

DSC_0278

 

Irrational behaviour and Dan Ariely

Understanding behavioral economics is a key element in helping us to make good decisions – so this is a short blog to let people know about the free course that is about to begin:

A beginners guide to irrational behavior by Dan Ariely.

I have read a few of his books and seen a number of his lectures. Not only does he know a lot about behavior economics and why we act and decide the way we do – he also conveys it in an entertaining and amusing fashion. I am really looking forward to the course.

The course is hosted by Coursera, an organisation offering free courses who have linked up with 33 other institutions – pretty impressive ones at that …. the likes of Stanford, Princeton, IE and Michigan.

I cannot vouch for he quality of all the courses, but have done one course on systems modelling (Michigan) and can only say it is excellent. You do not need to pay a cent or even buy the professors book. Content is delivered in videos between 5 and 15 minutes long – so it is easy to fit the occasional study period between tasks. It also only takes about 8 hours a week that even the busiest people should be able to manage, given you can listen to the videos whenever you feel like it.

The course starts on the 25th March, so sign up now! Click on the link to find out more and sign up at:

Dan Ariely: a beginners guide to irrational behaviour

I am a great believer in Covey’s “sharpening the saw” occasionally and can only encourage you to sign up to this course (or any of the other ones that grabs your interest) and sharpen your saw.

For interest – Coveys “sharpen the saw” video. Its wider than just education, but still worth watching.

Enjoy the course!