If you are like us, then you have probably always thought that strong analysis was the largest determining factor of success within an industry followed by strong execution. But McKinsey and Harvard research shows that decision process quality is more important – and by a wide margin. While industry variables count for a very large share and is highly interesting from an investor point of view, then out attention is grabbed by the whopping +50% related to the quality of the process, dwarfing the 8% that strong analysis will bring to the table. And that is from a company that lives of analysis! No wonder McKinsey has recently started to work on implementation…
So what is this process about? Well, firstly the research was focused on finding the factors determining performance for decisions about capital investments, product development and M&A by looking at 1,048 companies in the years 2004-2009. Specifically, the research focused on to what extent the companies were using 17 best practices in decision making.8 of these practices focused on the amount and detail of the analysis, e.g. if they had developed a detailed financial model or run sensitivity analysis. The rest of the 9 practices focused on the decision making process, e.g. if they had expressly researched and discussed significant uncertainties or view points, countering the top ranking manager.
Now the way the process practices were selected was by through significant research on what is effective in defeating biases by improving the ability to test ideas, assess the data foundation, bring in the right view points and simply being more realistic about company capabilities. The result was simple – the best performing companies had statistically fewer biases in their decision processes.
This is not the same as saying that the analysis was unimportant. Almost no decisions done through a strong and debiased process were supported by a poor analysis phase. The reason for this is that one of the factors, that a debiased decision process will unravel, is poor analysis work. The opposite is not the case. A perfect analysis is still useless in a poor process.
So what is the difference between companies managing processes well and those who focus mostly on analysis? A factor 6. Yes, that is an average of 600% above or 6 times as well for the companies with strong process as the average of the companies focused mostly on analysis.This is why we call it Factor 6 Strategy.