5 Steps to Better Decision-Making — Sixth and Final of Series
Tools are an inherent part of getting most jobs done well. A stonemason knows his way around a trowel and brick hammer, a mechanic around a wrench. There is no difference between the dependence of tradespeople on their tools and the dependence of those of us in business on ours. Knowing how to swing a spreadsheet or build a decision tree part of our job.
In his book, The Fifth Discipline, Peter Senge makes the case for learning organizations. One of the five disciplines he notes is that of systems thinking. Now, this is neither a reference to computer systems or management systems. Rather, it is a recognition that we live and operate in complex interdependent webs where actions have consequences, and often times those consequences are unintended.
The process for making better decisions we’ve been introducing over this series is really a tool, well suited for the decision-making part of a business, project, or life. In steps three and four of the process, we explored alternatives and their consequences and probably made some decisions as to which of these alternatives were acceptable and which needed to be eliminated. Some of those remaining on your list will satisfy some of your objectives but not all, and it’s at this point you begin making tradeoffs.
It’s important to note that you can’t base your decision on anyone's objective when several equally weighted objectives are involved. If your decision is to fly from New York to San Francisco as inexpensively as possible, you’d have several airlines to choose from. But if you wanted that same objective along with a convenient time, nonstop flight, and superior safety record you probably wouldn’t be able to satisfy all objectives without settling for a few tradeoffs.
The Process of Making Trade-offs
Deciding on tradeoffs requires tough choices, especially if the number of alternatives is extensive and each of your objectives has its own basis of comparison. Here’s where the concept of dominated alternatives becomes most effective.
For example, one alternative, “A”, that is better than another, “B”, on some objectives and no worse on all the rest is considered to dominate “B”. Using the consequence table, you’ll be able to rank the dominance of each alternative given the objective. If we return to the job seeker’s consequence table, under monthly salary, she is able to rank the highest pay grade with a “1” and the lowest grade with a “5”. There may also be ties. If two potential jobs are great in terms of the level of satisfaction, then both would receive a “1” in that category.
If you noticed a pattern that one alternative dominates all the rest, that clearly becomes your decision. But if you cannot decide, you’ll need to make tradeoffs using a process called even swaps. In the author’s words, “an even swap increases the value of an alternative in terms of one objective while decreasing its value by an equivalent amount in terms of another objective.
The following example, illustrated in the book Smart Choices: A Practical Guide to Making Better Decisions gives you a hands-on idea of the process of even swaps.
As the operator of a soft drink company, you are considering offers to buy franchises to bottle and sell your drinks. Currently, your market share is 20% and you’ve earned $20 million during the last fiscal year. In the coming year, your objectives are to increase profits and expand your existing market share. You surmise that next year’s profits would be reduced by $10 million if you franchise (because of start-up costs), but the market share should ultimately reach 26%. Now, if franchising isn’t an option, you figure profits would peak at about $25 million and market share at about 21%. So, do you franchise or not?
Step one in the even swap process: Decide what will cancel out one of your objectives.
If you cancel out the $15 million potential earning because you don’t want to franchise, your decision would focus on market share.
Step two: Decide what change in one of your objectives could compensate for your decision.
In this case, what kind of market share increase would compensate for canceled-out $15 million? You estimate that 3% is the most accurate.
Step three: Make the even swap
By not franchising, your potential profit is $10 million and your market share is 24%.
Step four: Cancel out the objective that no longer applies.
Here, since profits are calculated to be the same, your decision will actually hang on market share (see table below).
Step five: Eliminate the dominant alternative.
If your calculations are on target, it would be a smarter choice for the franchise (26% of market share) not (24%).
The authors say engaging in the even swaps process helps you make value determination one consequence at a time because each swap requires subjective judgement.
Developing these skills takes discipline and a commitment to continuous improvement. The pay-off in terms of managing risk and controlling the damage associated with greater risks will be well worth the effort.
Pathfinder Group can help you with the decision making process. We can assist you as you come up with the alternative ideas you need to make the best choices for your business. Our team of subject matter experts has been servicing businesses in Tampa Bay and Florida for decades.