Business leadership is all about making decisions. Decision making can not be easily taught in leadership courses, however good they are. See what is happening here.
A CEO is meeting his management team. The subject is review of some proposals for additional investments in manufacturing operations.
Head of Manufacturing (HOM): These investments will increase the capacity of the production line. We have bottlenecks.
Head of Sales (HOS): Yea.. we lost some sales recently due to supply constraints.
Head of Quality (HOQ): Rejections is another problem. This adds to the pressure.
HOM; But the rejections are within the budget.
CEO: What does finance say? What is the payback?
Head of Finance (HOF): Based on the trends on sales lost over last three months. Full payback from these incremental investment will take place over 18-24 months. That is why I have forwarded budget papers. We will need raise additional term loan, but our bankers have agreed.
CEO: Then what is the hitch? Go ahead…we need sales.
We had a coaching session two days after the above meeting. The CEO told me about this decision. The conversation went as given below.
Coach (I): But we recently discussed that our cash generation is low and resorting to additional financing will increase the interest burden.
CEO: But we have already invested so much in our manufacturing. This incremental investment will help….
Coach: That’s a classic case of historical costs or existing investments influencing decisions which have to work in future. Have the bottlenecks been analyzed? Various reports show that on-time material availability performance has not been good enough. What about in-process rejections? Last month’s reports stated that the in-process rejections were well above 10%. This is like 10% of the capacity is wasted. Could any of these be causing problems? Are you expecting further growth in demand? What happens if the product mix has to change?
CEO: Yea. I recall that there have been several order cancellations due changes in demands.
CEO: I see…it is better to go to the root of the problem. Our bankers had told me privately that though they would be happy to provide line of funding, in our interest we should generate more cash out of operations and retire some old loans which have adding to the interest burden. I will get this sorted out.
There are some issues here:
-Historical bias: The tendency to justify sinking more money because you have already done so.
-Functional bias: Each functional head defines problems narrowly (wrongly). Every functional head has undergone many leadership courses but the thinking has not changed.
-Financing bias: It seems that a good payback and availability of finance is all this needed to justify any decision.
-Tendency to throw money at the problem instead looking for root causes.
Learning Leadership’s executive coaching programs help management teams to examine business processes and root causes. Various workouts help them understanding problems in term of business processes. When executives do these workouts periodically, they get better in applying various principles.