“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
___ Theodore Roosevelt
While the objective of this article is to introduce a good tool for decision making, I could not agree more with Theodore here, the first and foremost point in art of business decision is that you need to make one, be it right or wrong. The result from business decision is always learning.
There is also a famous management mantra that a good business decision made at the right time is better than the best decision made at a delayed time. Then again a right business decision will not remain right at all times. There are so many aspects to decision making such as time, cost, people, etc. How does one keep track of all the aspects? How would one know the inputs to make the right decision? What is it that one needs to make the correct decision at the right time with the right resources in place is the question that every business leader should ask oneself.
In any company, major decisions have to be taken, mainly regarding the overall direction the company is to take and how it intends to achieve its aim. From my experience as a business consultant, I feel that business decisions fail because of the lack of total or credible business information to the leader and another critical reason would be ‘delayed information’ even though it may be accurate. There are tools aplenty available to analyse and make the right business decision. I would like to introduce two tools in this article that will aid you in both ends of the spectrum in the art of decision making, which is ‘decision making process’ and ‘information supply’.
Decision Tree – aiding in decision-making process
According to Wiki, “A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs and utility.”
To keep it simple, a decision tree is a graphical representation of the path taken and the path not taken, and how the decision to go one way over another affects your business. It is a scientific approach towards decision making. It will enable you to make decisions with facts and past experiences. The person or committee who is going to use this tool must know the goal of the decision clearly before adopting the approach. Normally in a decision tree, decisions are typically represented by squares, and uncertain outcomes by circles. To illustrate a business decision using a decision tree, I am going to use an example.
Imagine you work for a printer that has been exploring the possibility of a new printing technology (NPT). If this could be developed, it would yield a profit of INR 200 million. Initial research indicates a 25% chance that a particular dye X will be effective for NPT. However, it will require an additional INR 12 million in research and development to know for sure. Furthermore, even if the resulting compound is proved effective, another INR 8 million in testing (for a total of INR 20 million invested) will be required to have it approved by the government. There is an estimated 40% chance the testing will reveal serious defects and approval will be denied. This is reflected in the figure below.
The tree may be interpreted as follows: Starting on the right, a 60% chance of INR 200 million plus a 40% chance of losing INR 20 million is .6 × 200 – .4 × 20 = INR 112 million. Thus if, you pursued development, and the technology actually worked, but the government had not yet tested it, your expected profit would be INR 112 million. Now moving to the left, a 25% chance of INR 112 million plus a 75% chance of losing INR 12 million is .25 × 112 − .75 × 12 = INR 19 million. If you do not develop the product, you will receive nothing, so development is the correct decision. The path representing product development is coloured green, and the value at the root of the tree is INR 19 million.
Now, of course, in reality one may never know the probabilities with any accuracy. This is where creating an inventory of ideas and past data will help greatly. For example, suppose we have enough experience with the government to be confident in the 60% chance of approval, but the efficacy of particular dye is more problematic. The chemist who came up with it is the most optimistic and thinks it has a 30% chance, while the CEO is the most pessimistic, and only gives it a 10% chance. By experimenting with this probability, the decision tree software can quickly find the ‘break-even’ probability at which we would make the alternative decision. In this case it turns out to be 10%. That is, if the probability that the dye will actually work is 10% or greater, we should pursue development. If it is less, we are better off abandoning the project. Since this threshold is lower than even the most pessimistic estimate by management, it is easy to agree to go ahead with development. This is reflected in the two figures below.
To summarise the theory explained above, a decision analysis includes four steps. The first step is to get the business goal clear. The second one is an inventory of the actions that can be done in order to obtain the required results and the resulting events. The third phase is a representation of the considered actions and events on a decision tree. The fourth phase consists in making a strategy that maximises the expected utility of each decision.
Though a decision tree is a useful tool to make a good business decision, for it to succeed it has to be supplied with the right data and the business goal has to be clear. Supplying the right data is the key factor with any scientific tool. The second tool that I am going to introduce in this article is going to help you in supplying data to any business decision model (like decision tree). This tool is a part of the Business Intelligence Spectrum.
Management dashboards – providing information supply to the decision-making process
Imagine you are travelling in an aircraft and you come to know that there is no dashboard supplying any information to your pilot. It would be devastating, isn’t it? A business runs a similar risk without information at the right form at the right time. A management dashboard consists of key performance indicators of your business. These needs to be assessed with your past and industry standard data, which will give you amazing inputs for your business decision.
Management dashboards can be plugged into your business operating systems like ERP, Tally, Excel sheets, etc. It will pull relevant information from these systems and present you information required for business decisions. These dashboards can be prepared manually or there are many automated packages available in the market like Microstrategy, Cognos, Jaspersoft or Meye dashboards. There is also one more misnomer I would like to clarify in this article, many business leaders whom I have met during my tenure as consultants confuse reports to dashboard. A perfect example that differentiates both is that a report is like a newspaper with loads of information cluttered on a paper and a dashboard is like a user-friendly news channel giving you what you want. To put it in simple terms, a dashboard is push information. Many fortune companies employ a separate Management Information System Cell to come up with these data.
Let us take our previous example of the decision to be made for going in for developing a new dye. A typical dashboard will provide the following;
• Pick up data and give you your current financial status, which will enable you to first think of a decision for information
• Give you information of the cost of resources and other opex involved in a similar business decision in the past
• Give a small ‘What If Analysis’ on your entire investment and returns pattern
• Give you greater control of budget versus actual at all stages of decision making
• Give you, with its benchmarking facility, comparisons vis a vis industry standards
There are many more advantages that can be pulled out of these dashboards. In fact, in my experience of making and deploying dashboards, every business owner looks at his business differently and these dashboards have become a part of their life. They are helping them with right information at the right time, which enables them to use tools like decision trees to come up with good business at the right time.
Data is like a gold mine and information is like gold, tools like dashboard does the difficult part of digging the gold from the gold mine. Use them well and do not forget Mr. Theodore Roosevelt’s words. Make a decision, be it right or wrong! It is better than not making one.