Business Management – Improving the Decision-Making Process

If a business leader wishes to be more decisive, are there ways of, improving one’s confidence in each decision? As I stated in my blogs on the costs associated with delays, one important takeaway point is to understand is that there is a real cost of not making a decision. This can include factoring in the lost sales revenue, the ongoing cost that continues to steal cash, etc. In my view, this builds the case that good leaders will force their business to make timely decisions. This then begs the question: if a decision must be made, how can we make a better informed decision than just rolling the dice?

One good decision-making tool is to apply weight or significance to the various possible outcomes of a decision. This is done by using probabilities of success or failure for each of the options. How this analysis works is basically to weight each option with the probability of success and compare them. For example, a business is considering two similar cost options for creating a new product. The one option is designing and building a superior product inhouse that will generate more revenue. The alternative is to purchase a less desirable product from an outside source. However, this is a me-too product and will not generate as much in revenue levels. At first blush this may be an obvious decision. However, the risk of designing the product and hitting the mark is somewhat risky whereas the other option would just be to private label a quality product that already exists. If we assign the probability of success to each revenue outcome, even though the private label option will not generate near the revenue, the high probability of success weighs this as the better option. The table below shows one simple analysis that can be used to compare the two different options.

Option
Annual Return
Probability of Success
Weighted Value
Product Design/Build
$500,000
60%
$300,000
Private Label Option
$400,000
100%
$400,000

Of course, the mathematical models and numbers of options can be much more robust than this simple model. More analysis could show that the in-house option would have no risk in the second year of sales and the revenue could increase because of the uniqueness of the product. Likewise, the private label option could lose its luster and revenues could drop in the second year. All of these factors can be included in the model and the result with this additional information would reverse the findings of the original model, as shown below in the table.

Option
Yr 1 Rev
%
W/V
Yr 2 Rev % W/V Total W/V
Product Design/Build
$500,000
60%
$300,000
$600,000 100% $600,000 $900,000
Private Label Option
$400,000
100%
$400,000
$400,000 80% $320,000 $720,000

Ultimately, it is important that a business does not become hamstrung and unable to make a decision. If the business leader can keep the company moving towards making a decision, as shown above, there are many tools that will assist in making the right choice. The important point is that a choice must be made so the company can move ahead.

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Posted in Blog Post, Growing Businesses, Mergers and Acquisitions, Restructuring Businesses, Selling Businesses and Struggling Businesses

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