2.3 Decision Making & Problem Solving

Decision Making

Decision making is the process of choosing a course of action from available alternatives.

Every entrepreneur makes hundreds of decisions:

• Should we launch this feature?
• Should we hire this candidate?
• Should we raise capital now or wait?
• Should we expand to a new city?
• Should we pivot the product?

The quality of decisions — over years — defines the success of the venture.

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Types of Decisions

A skilled entrepreneur recognises what type of decision they face and adopts the right approach.

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Steps in Decision-Making (the Classical Model)

The widely-taught rational decision-making model has 7 steps:

Step 1: Identify the problem / opportunity

The clearest definition of the problem. Most decisions go wrong because the problem itself was misdiagnosed.

A well-framed problem leads to good options.

Step 2: Gather information

Data, facts, perspectives, expert opinion. Don't decide on assumptions when data is available.

But don't over-research — perfect information is impossible. Move when you have enough, not all.

Step 3: Generate alternatives

List multiple options — typically 3-5.

Common error: jumping to the first solution. Force yourself to ask: "What else could we do?"

Step 4: Evaluate alternatives

Compare options against criteria:

Visual tools help:

• Decision matrix — rate options against criteria
• Pros / cons list — qualitative
• Cost-benefit analysis — quantitative
• Decision tree — for branching outcomes

Step 5: Choose the best option

Make a clear decision. Don't waffle.

Bad signs:

• Endless meetings without resolution
• Decision delegated upward unnecessarily
• "Let's revisit this"
• Choosing nothing (which is itself a choice — to default)

Good signs:

• Clear decision documented
• Owner assigned
• Timeline set

Step 6: Implement

A decision without execution is a wish.

Step 7: Review the outcome

Did the decision produce the expected result? If yes — extract lessons. If no — learn what to do differently.

This feedback loop is what makes someone a better decision-maker over time.

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Programmed vs Non-Programmed Decisions

Programmed Decisions

Modern operations rely on programmed decisions made by systems — algorithms, automated approvals, rule engines.

Non-Programmed Decisions

Strategic decisions are non-programmed. They require human judgement that systems cannot replace.

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Approaches / Models of Decision-Making

1. Rational Model

What we just walked through — systematic, analytical.

Assumptions:

• Full information available
• All alternatives identified
• Clear evaluation criteria
• Sufficient time

Reality: Rare to have all of these. Still useful as a discipline.

2. Bounded Rationality (Herbert Simon)

Acknowledges that real decisions are made under constraints:

• Incomplete information
• Time pressure
• Cognitive limits
• Emotional factors
• Political considerations

Simon called this "satisficing" — choosing a "good enough" option rather than the optimal one.

3. Intuitive Decision-Making

Experienced decision-makers often "just know." This isn't magic — it's pattern recognition built from past experience.

Useful when:

• Time is short
• Pattern is familiar
• Data is incomplete
• Decision-maker is experienced

Risky when:

• Pattern is unfamiliar
• Stakes are extremely high
• Bias is likely

4. Group Decision-Making

Multiple people decide together.

Common techniques: brainstorming, Delphi method (anonymous), nominal group, consensus.

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Common Decision-Making Biases

Modern psychology (Kahneman, Tversky) has identified many biases that lead to bad decisions:

Awareness of biases doesn't eliminate them — but it reduces their impact.

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Problem Solving

Problem solving is closely related to decision making, but with a different focus:

Many problems require both — first solve the problem (find solution), then decide (which solution to implement).

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Steps in Problem Solving

A widely-taught problem-solving model:

Note the overlap with decision-making — they're related processes.

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Root Cause Analysis — 5 Whys (Toyota)

A simple but powerful technique. For any problem, ask "why?" five times:

Problem: Customer complaints rising 1. Why? — Delivery delays 2. Why? — Warehouse picking errors 3. Why? — New staff making mistakes 4. Why? — Training was rushed 5. Why? — Manager prioritised hiring fast over training

Root cause: training process. Fix the training, not just the symptoms.

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Other Problem-Solving Tools

Fishbone (Ishikawa) Diagram

Visual analysis of possible causes of a problem:

                      Causes                       Problem
                       │
   People → ─────┐
   Process → ────┼─────────────────────────→ "Why customers complain"
   Equipment → ─┘
   Materials →
   Methods →
   Environment →

Identify cause categories, brainstorm specific causes within each, investigate likely candidates.

Pareto Analysis (80/20)

80% of problems come from 20% of causes. Focus on the vital few.

PDCA Cycle (Plan-Do-Check-Act)

Repeat continuously. The basis of Kaizen / continuous improvement.

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Decision-Making in Real Entrepreneurial Situations

Real founders face messy decisions:

Examples

Each requires the full decision-making toolkit: define problem, gather information, generate options, evaluate, choose, implement, review.

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Decision-Making Frameworks for Specific Situations

Eisenhower Matrix (Urgent / Important)

OODA Loop (Observe-Orient-Decide-Act)

From fighter pilot training (John Boyd). For fast-moving situations:

1. Observe — gather info
2. Orient — interpret in context
3. Decide — choose action
4. Act — execute
5. Repeat the loop faster than the competition

Used in business strategy for competitive responses.

Cynefin Framework (Dave Snowden)

For matching decision style to situation complexity:

Different problems need different approaches. Many leaders apply the wrong style.

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Key Terms — Lesson 2.3

Decision-making and problem-solving share much vocabulary. The terms below cover both — the rational model, the cognitive-bias list (Kahneman is mandatory), and the operational toolkit (5 Whys, fishbone, Pareto, PDCA).

Decision Making — The process of choosing a course of action from available alternatives. Founders make hundreds of these daily; the aggregate quality of decisions over years defines venture success more than any single brilliant move.

Problem Solving — The process of finding a workable resolution to a defined issue. Closely linked to decision-making — first you solve (find candidate solutions), then you decide (pick one).

Strategic Decision — A long-term, high-impact decision that shapes the direction of the enterprise — entering a new market, raising a Series A, choosing a fundamental technology stack. Hard to reverse; usually made by founders or the board.

Tactical Decision — A medium-term, departmental decision about how to execute strategy — hiring a marketing head, choosing a campaign theme, signing a vendor. Reversible at moderate cost.

Operational Decision — A routine, day-to-day decision with low individual stakes but high cumulative impact — approving leave, restocking inventory, scheduling a sprint. Often programmable.

Programmed Decision — A routine, rule-based decision that can be made by following an established procedure or algorithm — auto-reorder when stock hits threshold, auto-approve travel below ₹5,000. Increasingly delegated to software.

Non-Programmed Decision — A novel, unstructured decision that requires judgement — entering a new geography, choosing a CTO, responding to a competitor's surprise launch. Cannot be automated; the work senior leaders are paid for.

Rational Decision-Making Model — The classical 7-step framework: identify problem → gather information → generate alternatives → evaluate → choose → implement → review. Useful as a discipline even when the real world prevents perfect adherence.

Bounded Rationality — Herbert Simon's Nobel-winning insight that real decisions are constrained by limited information, time pressure, and cognitive capacity — so people choose "good enough" rather than optimal. Counterweight to textbook rational-choice theory.

Satisficing — Simon's term combining "satisfy" and "suffice" — choosing the first option that meets a minimum acceptable threshold rather than searching for the absolute best. Most operational founder decisions are satisficing decisions.

Intuitive Decision-Making — Deciding by fast pattern recognition built from past experience — what Kahneman calls System 1. Powerful when the situation is familiar; dangerous when the pattern is misleading or unprecedented.

Group Decision-Making — Decisions made by multiple people deliberating together. Benefits: more information, diverse perspectives, shared ownership. Risks: groupthink, slower, dominant voices distort outcomes.

Delphi Method — A structured group-decision technique in which experts submit anonymous opinions in successive rounds, with feedback summarised between rounds. Reduces dominant-voice bias and is widely used in forecasting and policy.

Confirmation Bias — The tendency to seek and weigh information that confirms existing beliefs while discounting contradictory evidence. Most lethal entrepreneurial bias; antidote is to actively assign someone to argue the opposite case.

Anchoring Bias — The tendency to over-rely on the first piece of information seen (the "anchor") when judging subsequent information. The first salary number, the first price quote, the first customer's complaint disproportionately shape later decisions.

Sunk Cost Fallacy — The tendency to continue with a failing course of action because of past investment — "we've spent two years on this, can't quit now." Bad decisions look backward; good decisions look forward.

Availability Heuristic — Kahneman and Tversky's term for judging probability by how easily examples come to mind — overestimating dramatic risks (plane crashes) and underestimating mundane ones (car accidents). Founders read TechCrunch and overestimate competitor threats while ignoring their own attrition.

Overconfidence Bias — The well-documented tendency to believe one's predictions are more accurate than they actually are. Counter with pre-mortems: imagine the venture failed in two years and write the causes; then act to prevent each.

Loss Aversion — Kahneman and Tversky's finding that losses feel roughly twice as painful as equivalent gains feel pleasurable. Drives risk-aversion in established firms and explains why founders often double down on failing bets to avoid "realising" a loss.

Sunk Cost vs Future Cost — The economic principle that only future costs and benefits should drive decisions; sunk costs are irrelevant. Easy to state, hard to feel — most humans cling to sunk costs by instinct.

Status Quo Bias — The default preference for current state over change, even when change is clearly better. Counter with the framing: "If we were starting fresh today, would we choose this?"

Five Whys — Sakichi Toyoda's Toyota technique for root-cause analysis — repeatedly ask "why" (typically five times) to dig past symptoms to underlying causes. Simple, almost embarrassingly so, but the engine of Toyota Production System problem-solving.

Root Cause Analysis — Any technique aimed at identifying the underlying cause of a problem rather than just its symptoms. Five Whys, fishbone diagrams, and fault-tree analysis are common tools; the discipline is the willingness to keep asking past the obvious answer.

Fishbone Diagram / Ishikawa Diagram — Kaoru Ishikawa's visual cause-analysis tool with branches representing standard cause categories (people, process, equipment, materials, methods, environment). The standard go-to for structured group brainstorming on a quality problem.

Pareto Principle (80/20 Rule) — Vilfredo Pareto's observation that roughly 80% of effects come from 20% of causes — 80% of complaints from 20% of customers, 80% of revenue from 20% of products. Focuses managerial attention on the "vital few" not the "trivial many."

PDCA Cycle (Deming Cycle) — Edwards Deming's Plan-Do-Check-Act continuous-improvement loop: plan a change, do it on small scale, check the result, act to standardise or revise. The foundation of Total Quality Management and Kaizen.

Kaizen — The Japanese term for continuous incremental improvement through PDCA cycles applied across every process. Toyota's signature philosophy; the antidote to the "big reorg" approach to performance improvement.

Eisenhower Matrix — A 2×2 grid sorting tasks by urgency and importance — important+urgent (do now), important+not urgent (schedule), not important+urgent (delegate), not important+not urgent (eliminate). The standard executive-time-management framework.

OODA Loop — John Boyd's military-strategy framework: Observe → Orient → Decide → Act, repeated faster than the opponent. Adopted in business strategy for fast-moving competitive situations; the team that loops faster usually wins.

Cynefin Framework — Dave Snowden's decision-style-by-context framework: simple (sense-categorise-respond, use best practice), complicated (sense-analyse-respond, use experts), complex (probe-sense-respond, experiment), chaotic (act-sense-respond, stabilise first). The right approach depends on which domain you are in.

Decision Matrix — A scoring grid that rates each option against weighted criteria to produce a numerical recommendation. Useful for structured decisions; deceptive when the criteria or weights are subjective.

Pre-Mortem — A decision-making technique pioneered by Gary Klein: imagine the decision has failed catastrophically two years later and write the post-mortem now. Surfaces risks that optimism normally hides.

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Study deep

1. Decision quality compounds. A founder who makes 80% good decisions for 10 years dramatically outperforms one who makes 60% good decisions. Even small improvements in decision-making rate to huge results.

1. Speed matters too. A "good enough" decision now usually beats a "perfect" decision in 6 months. Especially in fast-moving markets.

1. Document your decisions. Write down: situation, options considered, decision made, expected outcome. Review later. This builds calibration — knowing when you were right or wrong and why.

1. Pre-mortem analysis is powerful. Before implementing, imagine the project failed. Ask "why?" The reasons that emerge are real risks you can mitigate now.

1. Recognise when not to decide. Sometimes "wait and watch" is the right choice — gathering more information, letting the situation develop. But this is different from indecision; it's a conscious choice with a re-evaluation point.

Common exam question (very common): "Explain the steps in decision-making." — 7 classical steps (identify, gather, generate, evaluate, choose, implement, review); mermaid diagram; with one example.

Common exam question: "Differentiate programmed and non-programmed decisions." — Programmed: routine, rule-based, easy, delegable. Non-programmed: novel, complex, requires judgement, senior leaders. Examples.

Common exam question: "Discuss decision-making models / approaches." — Rational, bounded rationality (Simon's satisficing), intuitive (pattern recognition), group decision-making; pros/cons of each.

Common exam question: "Discuss the steps in problem solving." — 8 steps; root cause analysis (5 Whys); fishbone diagram; PDCA cycle; Pareto principle.

Common exam question: "Discuss common decision-making biases." — 8-10 biases (confirmation, anchoring, sunk cost, availability, overconfidence, loss aversion, status quo, recency); antidote for each.