Are incremental decisions valuable over audacious decisions?
A heuristic—the game of inches—stood out to me while being invested in General Electric (GE) stock.
I started purchasing General Electric stock in 2018. At this time, General Electric had incompetent management and board members. Bad acquisitions, lack of strategic initiatives, mounting debt and fraudulent activities were all common. The organization was so complicated that reading its annual letters was a nightmare. Eventually shareholders threw in the towel and the stock tank.
General Electric was booted out from the Dow Jones index after 110 years in 2019. It was debatable, but General Electric was likely headed towards bankruptcy. General Electric's major business portfolio included electricity, power, renewables: wind turbines, airplane engines, military contracts and digital services.
Markets would have felt the implosion of General Electric but Larry Culp came to save the giant. Larry Culp was already a well known CEO before joining General Electric. I listened to every single one of his calls and read his letters he published while at General Electric.
He frequently brought up the game of inches analogy. He would say that turning around General Electric is a game of inches every day, not feet or miles, and everyone following the General Electric story should keep the score together. Larry borrowed the analogy from a football movie Any Given Sunday.
In two years General Electric made many strides since Larry Culp took over, and they were huge in magnitude. His management style is heavily influenced by LEAN methodologies. If it weren't for these incremental steps, General Electric might not have survived during the 2020 pandemic. Today it is a much more stable organization. Larry Culp's heuristic the game of inches is important one to remember when faced with a complex and giant problem.
If you are a real-world decision maker such as Larry Culp, you may choose to analyze, or you may choose to act. There is a real trade-off. Studying about decision-making frameworks isn't the same thing as effective action.
If we lived in a perfect environment presented with all possible outcomes, a rational choice theory from economics would be ideal. However, frameworks and models are not immediately applicable to the real world because the real world does not share all the assumptions used in textbooks and neither does the markets wait for you.
Decisions in the real world are time sensitive; the sooner you act, the more you realize from an action. What if Larry Culp waited for several board meetings to plan out the General Electric turnaround? He made decisions right away after becoming the CEO. He cut the dividend to a penny. Whereas, previous management stalled for months on whether to cut the dividend. General Electric might not have survived during the pandemic if the management had not made those decisions earlier and acted sooner. There is a cost associated to doing decision analysis.
Action generates new information which then allows you to make better decisions. In the real world, the utility of each choice depends on the decisiveness with which you act on your analysis.
If the world were static, the decision-analysis frameworks would be useful. But in a dynamic and complex world, playing the game of inches and a bias towards action are much more meaningful. My investment return on General Electric was not significant, but watching Larry Culp taught me the importance of bias towards actions. A valuable lesson for me.