Business Judgement – Step-by-Step Guide to Improve It

What is business judgement? What is good, or bad, business judgement? Is business judgement the same for marketing, digital and IT, strategy, and even operations? Is it your understanding of business? Can you have business judgement if you do not know much about business? Do you need an MBA to have business judgement? Can a person without a university degree have business judgement?

Summary: We define business judgement as the way we interpret information. And the way we interpret information is the sum of our experiences, formal knowledge, social networks, informal knowledge. Then it is our willingness and ability to draw on them when interpreting information.

Business judgement is routinely listed as a key soft skill or business skill. Yet, at the time of writing this article, Wikipedia did not have a definition for the word. This article will provide a definition and teach you how to improve your judgement.

Why do you need business judgement?

Let’s explain business judgement and, thereby, define business judgement using the example below. Here is an exhibit[1]from the WSJ. We want you to look at this and answer one question.

Is the unemployment rate dropping in Elkhart, Indiana?

Don’t read the article since it’s not relevant to the point being made.

Exhibit 1: Elkhart, Indiana Unemployment Rate

Exhibit to explain business judgement from the Wall Street Journal.
Exhibit to explain business judgement from the Wall Street Journal.

Take some time to review the exhibits, list your answer along with just two or three reasons from the data to support your answer. It’s perfectly fine if you read the exhibit, go ahead with your plans for the day and complete this small exercise at the end of the day or week. Learning soft skills should not be rushed. You will likely notice one of two things or both. There are other things you could see, but these two are the most common answers:

A The majority would say yes, unemployment is clearly dropping. And you would be right if this was your answer.

B A minority of readers may realize that many workers probably left Elkhart over the last few years since the depression. This normally happens in regions where job opportunities decrease. The data does not give us this information, but it is reasonable to assume this.

Always dig into the numbers

Staying with option B above, the drop in the unemployment rate (typically defined as # unemployed / total # adults able to work and either working or seeking jobs) is driven both by more jobs and fewer workers to hire. In other more words, the unemployment rate can drop for at least 3 reasons.

#1 The number of adults working increased while the total population of active adult job seekers remained the same, decreased or increased at a lower rate than the adults working.

#2 The number of adults working remained the same while the total population of active adult job seekers decreased. In this case, unemployment is dropping, but it is not something to celebrate. This group would also be right.

#3 The number of adults working decreased while the total population of active adult job seekers decreased at a higher rate so that overall there is a drop in the unemployment rate but it is even harder to find a job. In this case, again, unemployment is dropping, but it is also not something to celebrate. This group would also be right.

From business judgement to recommendations

Reason #3 is often more appropriate, or more right, since one can then craft policies to deal with a region lacking sufficient jobs and/or qualified workers. Policies which create jobs / attract businesses would be developed. These can include better schools for the children of workers, new homes, etc. Tax incentives may be considered.

With option #1, one could end up crafting completely different regional policies that did not factor in the primary reasons for the decrease in unemployment. With this interpretation, the region may raise taxes, since they think everyone who wants to work is working. This further lowers the tax base if more workers choose to leave because of the high taxes.

If implemented this advice would hurt the city but also create your own reputational damage.

Defining business judgement

As you can see, different people looking at the same data would almost certainly arrive at different conclusions. This is why we call it a soft skill. Soft business skills are influenced by many personal and emotional facts and feelings. It also means this skill is hard to copy since it is difficult to understand. Building a career competitive advantage here is a wise strategy.

In fact, two people with seemingly similar profiles will arrive at a different interpretation. This is because their pool of knowledge and experiences differ, and this directly drives the way they interpret things. Now we can define business judgement as the way one interprets information. And to interpret the information we typically rely on our past experience, readings, and teachings, what we see in the media, including travel experiences.

Let’s think about what this means. A waitress, without a degree and no formal work experience, working at a café in San Francisco could correctly realize the drop in unemployment in the exhibit above is probably due to more people like herself leaving depressed areas. Her knowledge and past experience give her better business judgement here.

Education does not equal business judgement

A brilliant consultant with an impeccable upbringing and advanced degree, working at an elite firm with time to only watch “Succession” on HBO, may not know this since the show, while very good, is not about average U.S. experiences. This consultant may not have the past experience, social network, media exposure, education nor travel exposure to realize this may be the reason the unemployment rate is down. All experience matters when it comes to business judgement.

The mistake we make often is to ignore everything we have ever done in the past, and only think about things we read about in the WSJ, NYT, HBR, etc. Now that we took time to define judgement and its levers of applying one’s past experience, readings and teachings, what we see in the media, and travel experiences, we need to improve our judgement and thereafter remember to apply these levers to any situation where we have to interpret information.

Improving judgement

To have good business judgement one must be willing to marshal everything they know and apply it.

If you want to build out your judgement you need to think about the source of your knowledge:

Past experiences (packing trucks, waitressing, being mugged.)

Readings (high school, university, media, books, comics.)

Education (high school, university, ongoing development.)

Social network (your significant other, friends, family, and their conversations.)

Media exposure (cable, internet, streaming.)

Travel (the trips you take daily and on vacations.)

Stressful events (trauma, stress, tragedy are all lessons.)

No one source is better, and a balance is not necessarily better to build this soft business skill. Television and media can be a great source of judgement, provided you distinguish between what is real and staged, and know how to apply information from staged shows. You also need to think about why an article was published.

If you do have a very narrow exposure to one set of views, you can either expand your exposure or compensate for your exposure when applying what you know.

For example, assume you earn $300,000 / annum and are trying to estimate organic food consumption across the U.S. You should not use your monthly organic food bill as a guide since your profile does not represent that of the average American citizen. That is one of the most common mistakes. In this case, just realize your data is not representative and adjust downward or upward as the case may be.

Make your business judgement copy-proof

Do not be embarrassed about watching hours of Bollywood, K-POP, Italian soaps, telenovelas, cooking shows, etc. Celebrate your heritage and differences and apply it as needed because it is unique. It cannot be copied. You never know how that knowledge could be useful. I watch an incredible amount of television. And it helps with my reasoning. For example, I could very well one day be advising a large U.S. hospitality business and need to help them optimize their sourcing. Knowing types of food used by different nationalities could be useful to develop early hypotheses.

If you take any business issue and break it down to its component parts, it is no longer about business. The business issue could, for example, become the problem of convincing families in Chicago to buy insurance, or which ingredients should be used to make medicine “tastier” to children, or how to stack more boxes in a semi-trailer that is traveling from Mexico to the USA. As you can see, very mundane sources of knowledge can help here. You just need to use what you already know.

Simple business judgement test

Try this when you have some time. Look at some data in the media and draw conclusions just using the knowledge that you have traditionally considered worthy to use, possibly something you read in a consulting publication. In other words, apply your business judgement the way you traditionally have.

Now, repeat the exercise with the same data. Try drawing conclusions using everything you know whether it embarrasses you or not. You should see a huge difference.

Since people are often too embarrassed to mention/use a data source from their personal life can you imagine how many poor decisions have been made in history?

Business judgement takes about 3 to 6 months to improve. Yet, if you start applying what you already know, it will be faster. Think of building business judgement as a component of your overall efforts to learn strategy. You will need to develop a learning plan and it helps to think of business judgement as the glue that holds all the technical skills together.

Without good business judgement, even the best analyses will fall apart. Think of judgement as the glue holding everything together.

Harder business judgement test

If you are still not sure you have business judgement and think you need to discard all your personal experiences, let’s do a simple exercise to show you the value of your unique business judgement. This is based on the way we define judgement above. Why not try to arrive at the answer before you see the proposed approach.

Let’s assume you are working at your office and about to launch a new beverage in India. Your company produces the beverage and you are based in the West. You are in a team debating how and where to launch the beverage.

Half the group wants to launch across India, but another group wants to target one city at a time, starting with Mumbai. The deciding factor is whether it is worth the effort to start with Mumbai.

Is the city large enough? Is the market large enough? You are in the meeting and you need to really think about which side to support. You need to apply your business judgement and you have no idea of the population of Mumbai and you suspect India is between 1 billion and 2 billion people.

Business judgement solution and relative reasoning

This approach to applying your business judgement is something we call relative reasoning.

Step 1: Pick the population of a city you do know, that is roughly of the stature of Mumbai

You know Mumbai appears to be the main city in India, or at least one of the most prominent cities in India. You roughly recall it coming up in some conversations with colleagues.

Now, you know for a fact that New York City is the most prominent city in the US.

Step 2: Adjust the New York Population of 10 million

it makes sense that the population of New York would be lower than Mumbai because India has a bigger population and seems to be very densely populated,.

Is it 3x larger or 10x larger? Now you can apply another relative reasoning step.

Step 3: Keep adjusting the population relative to what you know

If you think the population of Mumbai is 100 million is it reasonable it would be bigger than the population of any country you know? Like Germany at around 80 million. You should use your own country or another large country you know.

You agree it’s bigger than New York City but probably smaller than Germany. So that puts you between 10 million and about 80 million.

Step 4: Keep adjusting the population relative to what you know

Is it midway at 45 million? Still seems high. You apply another relative reasoning step comparing it to cities you do know and making more adjustment based on how different they are from Mumbai. You read somewhere that China has the largest cities in the world and the population of Beijing was around 22 million.

Is Mumbai larger? Probably not so you adjust it down to 20 million.

Now you can work with this number to determine if the city of Mumbai with a population of 20 million is a worthy pilot site to launch the beverage. The goal in this exercise is to show you how business judgement works.

You take what you know and compare it to what you don’t know and constantly tweak and adjust the number until you feel reasonably confident the answer makes sense. It does not need to be accurate. It just needs to be close enough.

Soft skills and business judgement

In general, problems requiring you to analyze data require more business judgement. Operations problems or healthcare problems tend to be the most difficult simply because operating facilities produce reams of data to be analyzed. It’s easy to draw the incorrect conclusions. In corporate strategy one is essentially making a bet that some future market will be worth the effort.

There is no analytic tool that can remove the risk of picking the market that will be attractive, growing and profitable in the future. So you need to look at all the data and make a business judgement call.

We used many data examples to explain business judgement, but it is used extensively in non-data situations. It is also used when interpreting a social situation like managing a mistake you may make with a client.

We tend to have certain default responses to events, even when they do not work. It is much more effective to step back, mine your experiences and think about how this event may require a new response.

Good analyses cannot replace good business judgement

We hope we have given you some confidence in your abilities and helped you define judgement. Business judgement is essential, and it comes from everywhere. The main thing to remember is not to assume you must ignore what you already know.

You must learn to use it. If you think you lack business judgement, or you simply don’t have the ability to apply what you know, then applying first principle skills analysis will help but only up to a certain point.

For example, in the drop in unemployment question, you could have brainstormed from first principles that the unemployment rate = (# unemployed / # total employees). Either the numerator is going down while the denominator stays the same. Or the numerator went down while the denominator also shrank at a slightly lower rate.

So, first principles analyses help you figure out what drove the issue, but you still need to apply business judgement to determine what likely happened.

The obstacle with solving problems only with first principles and leaving out business judgement is that anyone can learn how to solve a problem from first principles.

Your input is uniquely valuable because of the business judgement  only you have, since no one other than you had exactly the same combination of experiences.

If you have no unique business judgement, your employer could essentially hire anyone who knew how to solve a problem from first principles or simply automate the task.

Analysis will only get you so far. How you interpret the findings is business judgement. And having the confidence to put forward a controversial interpretation based on your business judgement is equally important.

Business judgement resources for subscribers

Our subscriber content sites behind a paywall. For subscribers reading this article, the following links will help you improve your understanding and practice of the concepts above.

What is business judgement?

How to solve problems and apply judgement

How to build business judgement

For loyalty members, Insiders, you will find more advanced content on StrategyTraining.com showing you how we applied the concept.

How to apply judgement: turning disadvantages into advantages

How to apply judgement: understanding when to publiscize achievements

How to apply judgement: when to avoid best-practices

This article is adapted from the soon to be released revised and real-time update version of “Succeeding as a Management Consultant.”

[1]https://www.wsj.com/articles/the-future-of-americas-economy-looks-a-lot-like-elkhart-indiana-1522942393