Decision analysis can only be effective if leaders have the bandwidth to act, are clear on purpose and fully understand their options.
Making effective strategic decisions in today’s business world is difficult. It’san environment that is messy, fast-moving and unpredictable: whether you’re entering a new market, responding to geopolitical shocks, pursuing innovation or trying to adopt a new technology like AI.
Faced with such challenges, it’s no surprise that many firms use decision analysis to help them accelerate and simplify the decision-making process. By utilizing concrete tools, leaders can better weigh risks, quantify trade-offs and bring structure to complexity, helping businesses solve complicated and pressing problems in a swift, objective and effective way.
However, there is a catch. Decision analysis is only helpful if three prerequisites are already in place: leaders must have the bandwidth to engage with the process, they must be clear about its purpose, and they must have fully considered their options. Without these foundations, even the most sophisticated spreadsheets, simulations and decision trees will not produce a useful or reliable answer.
1. Bandwidth: Having the space to think and act
The quality of any decision suffers if leaders don’t have the time, money and resources to work effectively. But bandwidth also includes cognitive space. Leaders can borrow money and hire staff, but unless they expand their own capacity to think, focus and judge wisely, decision quality will not improve. This is why bandwidth must come first when considering the three prerequisites of decision analysis.
Why? Because clarifying purpose and generating options both consume bandwidth. Clarifying purpose involves discussion and reflection. Generating options requires research and creativity. Bandwidth is an essential element after decision analysis, too. Executives may assume that once the “what” is decided, the “how” will naturally fall into place. Yet, strategies may still fail, not because the decision was flawed, but because an organisation lacked the capacity and resources to execute it.
A manufacturer, for instance, might identify an ideal roadmap for digital transformation, with the analysis showing clear returns. But if the firm lacks the necessary IT talent and dedicated time to implement it, the roadmap will fail in the real world, despite its promise on paper.
2. Purpose: Why are we doing this?
Purpose defines what success looks like. It keeps leaders from getting lost in attractive but irrelevant information. Without a clear purpose, a decision analysis risks solving the wrong problem. Clarity of purpose transforms the process from a technical exercise into a strategic one.
But getting purpose right requires effort. It means asking uncomfortable questions. What do we really want? Why do we want that? Whose interests matter most? What trade-offs will we need to address? Such discussions may not fit neatly into a slide deck, but without a decent level of clarity on purpose, everything that follows could be irrelevant.
The best outcome of any decision analysis also depends on its specific purpose. Consider a company deciding between two expansion strategies. If the purpose is to maximise short-term profit, one strategy may appear preferable. But if the main goal is to build a long-term presence, the very same analysis may favour the opposite choice.
Any discussion of purpose must also yield a clear result. Many leaders believe they have clarity of purpose when, in reality, they do not. Asked what the goal of a new initiative is, executives in the same firm sometimes give different answers: be it growth, profitability, customer satisfaction or risk reduction.
If your purpose is unclear, your decision analysis cannot be effective.
3. Options: Expanding the decision space
Decision analysis assumes that leaders make decisions based on the best options available to them. Yet, to be cost-efficient, decision-makers often end up working with only the most obvious or immediately available options. Unfortunately this means that, however effective the decision analysis, the result will be the “best” choice among a poor set of alternatives. For instance, a company focusing on whether to build or to buy a new technology might ignore a third option: forming strategic partnerships.
Generating more options also helps ensure that a decision is correctly framed in the first place, as considering alternatives forces leaders to really learn about the problem at hand. The quality of decisions rises when leaders make a deliberate effort to generate more options before moving to analysis. And this route often proves to be cheaper in the long run than executing the wrong strategy.
Key takeaways
- Start with bandwidth.Secure time, attention and resources before clarifying purpose or generating options.
- Purpose prevents wasted effort. Once bandwidth is secured, align the decision around a clear, shared objective, or risk solving the wrong problem.
- Options create quality. Rather than settling for binary or mediocre choices, push teams to expand the decision space by generating new options.
- Don’t rush analysis. If one or more of the three prerequisites is missing, resist the urge to run models or build slide decks: take the time to build a better foundation first.
- Decision analysis is a tool for amplification, not substitution. In decision analysis, the quality of your input dictates the quality of the output. The process cannot be a substitute for poor inputs.
Decision analysis can be a transformational tool for any business, but it’s not a silver bullet. It can improve the quality of your thinking, but it cannot function if you haven’t established firm foundations in bandwidth, purpose and options. Only if these three prerequisites are in place can it help businesses navigate uncertainty with clarity and confidence.
Source INSEAD