E(P_1 )= .5 ×(V_1+ V_2)
E(P_2 )=p × .75 ×(V_1+ V_2 )+(1-p) ×(.25 ×V_1+ .5 x V_2)
Above is the formula used by researchers to find a viable solution in Hoch and Kunreuther's book Wharton on Making Decision. The decision to be made with this formula was whether or not to use a current distributor who has historically reached 50% of customers or taking on a new distributor that has the potential to reach 75% of customers, yet only reached 25% last year (pg. 40). By deduction of reason and formulation it is possible to discover the probability of risk when making important decisions that could potentially have a sizeable impact on a business. However, not all of us are researchers and statisticians.
Making decisions is what makes us unique from most other animals on the planet. We make hundreds if not thousands of decisions every day. Small, mundane decisions to Large, holy cow decisions are part of our daily routine. How we think about making these decisions is worthy of some thought.
For me, the formula above does not fit in my decision making process. This is not to say I don't think things through, look at all the options, and weigh out the possible consequences of my decisions, I do... just not in such a mathematical way. In the situation above I would probably take the calculated gamble on the new distributer with the possibility to increase my customer reach. If it doesn't work out or meet my expectations we always have the option of the first distributer. Granted, this would be more work down the road, but if distributer #2 made some strategic changes in their processes is the gamble worth an additional 25% exposure? I would say so. No formula needed.
As a General Manger for a small retail outdoor living store I make decisions each day that could affect our bottom line. For me, it is important to accumulate as much knowledge as I can about what I am making a decision on. I will ask several people and seek out advice and experiences from others, take into account our historical successes, and listen to my gut in order to make a sound business decision. While the later may not be as scientific or accurate as the others it hasn't failed me more than my "gut feeling" has saved me. Experience is a valuable asset to have on your side when making decisions and this experience tends to migrate towards the lower abdomen area of my body. It reminds me of painful mistakes from the past and serves as a beacon for making good choices in the future. Scientific, no. Helpful, yes.
Strategic planning is just long-term decision making, and I feel it is important to use your resources available to you to make informed decisions that have long reaching affects. Logic is a balancing tool I use to wrangle in my off the wall ideas, but I do not think I would benefit much more from using an optimal dynamic decision analysis tool in the sense described in this text. Yes, I would write down pros and cons. I would research fully my options. And, as a result, I would make a sound decision based on sound thinking. Same result, different method.
To measure the effectiveness of a decision you must track the progress. Inspect what you expect, and make adjustments when needed. To get back to the problem at hand, if the distributer #2 didn't hold up their end of the bargain, and I was not reaching close to 75% of my customers we would have to make some more decisions and possibly make some changes. Reputation is everything in the business world, and reputation is earned by doing what you say you can do repeatedly. However, reputation alone is not the end all be all for choosing to go with one distributer over another. The decision for me is constant improvement, and I track these processes carefully.
To sum up, decisions are important and a way of life. Small or large we should consider all the options before making rash choices. If using a formula helps to make an informed decision, use it. As for me, I will continue to use a fluid, dynamic approach to making the right choices. It helps that I am not afraid of making mistakes as this fills up my gut-o-meter with that valuable knowledge fuel I have come to rely on so heavily.
JP
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