An Organized Decision: Key Elements of a Decision
There are many types of decisions, but they all share a few common features. Here, the four key elements to consider before making a decision.
The Greek philosopher Heraclitus wrote: “No one bathes twice in the same river”. Though it is true that we never face the same decision twice, some elements are repeated in all situations in which we have to choose a course of action.
1) The objectives
Objectives are the reasons why we decide and are defined by the future state we hope to reach. Precisely, we make the decision to bridge the gap between the desired future world and the world that will occur if we do not act. The objective is the answer to the question: why are we deciding?
Much of our success as decision makers depends on our ability to define the four basic elements that make up any decision situation: objectives, alternatives, uncontrollable variables, and parameters.
Every well-stated goal is made up of three factors:
An attribute or metric: What is it that we want to modify with the decision? For example, company profits.
An operator: What is the level we want to achieve for that attribute or metric? In our case, what do we want to happen with the profits? For example, getting them to surpass the threshold of 10 million dollars per year.
A completion time: When do we expect the goal to be achieved? In our example, how soon do we expect the decision to allow us to surpass $10 million in profit?
2) The alternatives
The alternatives are the possible paths we can follow to reach our objective. In any decision, there are at least two alternatives. If there were not, there would be nothing to decide.
For example, if we perceive the only way to lower prices is to use lower quality material in the manufacturing of our products, there is no decision to make.
But, if we also believe we could improve the efficiency of our production system to reach the same objective, we would have two alternatives and, therefore, a decision situation.
Each of the alternatives must be viable, lead to the desired objective and be exclusive with respect to the others.
These conditions are not trivial. Companies often spend a lot of time and effort developing unfeasible ideas and advancing projects that are not aligned with the desired goal. Sometimes, the lack of a correct approach to the alternatives forces us to make hasty decisions in situations where it was not necessary to make any decision.
Many companies engage in fierce internal discussions between two products to decide which one to launch. In many cases, a more careful analysis would have indicated that both could coexist in the market
3) Uncontrollable variables
Uncontrollable variables include all those elements that affect the outcome of the decision but are beyond the control of the decision maker. The dollar’s exchange rate, for example, affects the profits of an export-import company, but there is nothing the firm can do to modify that variable.
It is important to consider two issues regarding uncontrollable variables.
Uncontrollable, for whom? Some variables are uncontrollable for some decision makers, while controllable for others. The price of the dollar is beyond the control of an export-import company, but it can be modified by the Central Bank through foreign exchange trading operations.
Unknown vs. Uncontrollable. There are data we do not know but are capable of researching to understand their behavior. A manager may not know the final price at which a product of his company is sold in a certain area, but this does not mean it is an uncontrollable variable. He can always ask the right person what that figure is and incorporate the data into his decisions.
As decision makers, we must choose the uncontrollable variables that we will consider in our analysis. These should be broad enough to cover those with the greatest impact on results, but not so broad that we are paralyzed by an overdose of information. Therefore, uncontrollable variables with less impact on the results should be omitted from the analysis.
4) The Parameters
Parameters are data that arise from the past and that the decision maker knows. For example, at the time of planning, each manager knows the budget assigned to them by the company.
Although we may doubt the reliability of the value of the data, this is an issue that is not related to the uncertainty present in the variables, but rather depends directly on the reliability of the informant or the measurement system that we are using to obtain it.
Parameters can sometimes act as constraints that affect the courses of action being evaluated. An area’s budget will surely be a restriction for the number of projects that can be carried out, the scope of the initiatives, the products to be launched, etc. In short, decisions are of many types and on many topics. But they all share some common traits. Discussing these four elements with our team will allow us to make a more accurate diagnosis of the situation and move towards making smarter decisions.
Director at Tandem.