Decision analysis

By: RAM CHARAN

Getting to the right answer is tougher these days. It’s not just the greater number of variables to consider, executives also need to make subjective judgements about highly ambiguous factors that are moving targets.

The usual competitive analysis doesn’t work well when technology keeps erasing industry boundaries and the pace of change is so fast that you can’t wait for things to stabilise. So, you’re wrestling with more qualitative factors, with no conventional methodology, under the real threat that part of your business has peaked or could become irrelevant.

Meanwhile, enormous opportunities that require big bets arise and vanish quickly. And you have to take into account potential consequences for a range of constituencies who may have no direct long-term economic interest in the business : regulators, shareholderactivists , societal watchdogs, the media… The most successful CEOs actuallydevelopandshapeoptions in their minds.

How do you test a decision? By thinking through as many secondand third-order effects as you can. It’s not just a matter of knowing the expected RoI.

If you decide to make a major investment in country A, of courseyou’llwanttocalculate the return, but you also have to understand the community issues, the government issues and the likely reaction of competitors : current competitors, potential competitors and local competitors.

From“You Can’t Be a Wimp—Make the Tough Calls ”