Strategic Decision Making: 5 Decision Support Tools
Do people always follow a rational linear process to come to a decision? Studies have suggested that a combination of Decision Making Models are used by people to reach quality decisions.
Strategic Decision Making is a complex process with a lot riding on those decisions. Eliminating risk from Decision Making is unthinkable but radically enhancing chances of success is a realistic goal.
In making Strategic Decisions, executives tend to rely only on those Decision Support Tools they know best. The usage of non-optimal Decision Support Tools is, in part, due to lack of knowledge about which tools work best in a particular scenario and, in part, due to lack of information regarding what tools are available out there.
Having access to a variety of Decision Support Tools increases the likelihood of making a successful decision provided the decision maker has knowledge of which tool to employ or a combination thereof in various scenarios.
The following 5 Decision Support Tools or their combination is applicable in a variety of Decision Making scenarios:
- Conventional Capital-Budgeting Tools
- Quantitative Multiple Scenario Tools
- Qualitative Scenario Analysis
- Case-based Decision Analysis
- Information Aggregation Tools
In some cases, just one tool is needed while in others an assortment of tools makes for the best combination.
Let us delve a little deeper into some of these tools.
Conventional Capital Budgeting Tools
Projected Incremental Cash Flows are used from likely investments to ascertain whether a project merits being funded through the firm’s Capitalization Structure. Included in it are Discounted Cash Flow, Expected Rate of Return, and Net Present Value models.
Quantitative Multiple Scenario Tools
Decisions are analyzed by completely specifying possible outcomes and their probabilities. Mathematical, Statistical, and Simulation methods are employed to distinguish the Risk and Return properties of prospective choices. The tools include:
> Monte Carlo Methods
> Decision Analysis
> Real Options
Qualitative Scenario Analysis
These techniques are beneficial to decision makers who encounter excessive levels of uncertainty about outcomes because the techniques do not assume a conclusive and entirely specified set of possible outcomes.
Real-life business Decision Making often comprises of judgments that are based on incomplete and uncertain information. This can be mitigated by using appropriate Decision Support Tools. However, which tools are appropriate will depend on the answer to the following critical questions:
- Do I know what it will take to succeed?
- Can I predict the range of possible outcomes?
The Causal Model question — combination of Critical Success Factors (CSFs) and economic conditions leading to success — needs settling before we can proceed to answer the 2nd question regarding Outcome Prediction.
Managers need to ask the following in order to clarify the state of the Causal Model hence the answer to the question:
- Do I comprehend what combination of Critical Success Factors will decide if my decision leads to a successful outcome?
- Do I recognize what metrics need to be met to guarantee success?
- Do I have an accurate understanding of how to attain success?
The other question to answer is: Can I predict the range of possible outcomes?
Managers should ask the following in scenarios predicting various outcomes and probabilities:
- Can I outline the range of outcomes that may result as a consequence of my decision, both as a whole and for each Critical Success Factor?
- Can I measure the probability of each outcome?
Even where the CSFs and Model for Success are understood, it sometimes becomes difficult to predict range of outcomes and their probabilities due to uncertain conditions.
Interested in learning more about Decision Support Tools? You can download an editable PowerPoint on Decision Support Tools here on the Flevy documents marketplace.
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