Leadership

3-Step Process for Analyzing Business Tradeoffs

By Steve Tobak

Updated on: September 17, 2009 / 5:12 PM EDT / MoneyWatch

In yesterday's post, Tradeoffs Make or Break Careers and Companies, we discussed the role of tradeoffs in major decisions affecting careers and businesses big and small. The post referenced four examples to highlight the point:

Whether to stay in a safe job that pays well or take a big risk on a startup or by becoming an entrepreneur
How Twitter can monetize its business without destroying the viral attraction and simplicity of its microblogging site
Whether Deutsche Telekom (T-Mobile's parent company) should risk a failed merger by acquiring Sprint Nextel to grow its U.S. wireless business
Whether a dentist should move to a more favorable location to gain access to new clients at the risk of alienating existing clients

While these are four distinct situations, there is indeed a common process I use for analyzing these and other complex tradeoffs and making the right business decisions. In every case, the process - which closely resembles a strategic planning process - comes down to three steps:
3-Step Process for Analyzing Business Tradeoffs

Situation analysis. Develop as objective and accurate an understanding of your or your company's current situation as is reasonable or feasible given the magnitude of the decision. That may take a great deal of effort and research, especially for major decisions like a megamerger between DT and Sprint Nextel, or developing a business strategy for Twitter.
Long-term goals. Determine your or your company's long term goals, mission, whatever you want to call it. Of course, that must be reconciled with any short-term operating plans you may have, especially for public companies, as well as your appetite for risk. It's also a good idea to develop three to five core strategies you plan to employ to meet those goals.
Decision tree analysis. Map best, typical, and worst-case scenarios for each potential outcome of the decision tree onto your current situation analysis from step one, and see which outcome has the highest probability of achieving the goals in step two within the risk profile boundaries. Sometimes, the result requires an iteration of the goals or strategies because their associated risk is unacceptable.

Let's take the case of Deutsche Telekom, for example. If we assume that the situation analysis - relatively flat revenues for several years (true) - does not satisfy the company's growth goals (likely), and a key strategy is to significantly grow its share of the U.S. market (also true), then an acquisition of the number three player - Sprint Nextel - would appear to be a viable solution.

But if the probability of a failed merger falls outside the company's risk profile (likely), then DT should consider toning down its U.S. growth goals and seeking that growth somewhere else, geographically. At least, that would be my decision after an admittedly simplistic, cursory analysis.

So, that's the process. If you were looking for a quick fix or silver bullet answer, sorry to disappoint you; there simply isn't one. There almost never is. Frankly, if you're not willing to do the work, you might as well flip a coin. In that case, you have no business being in business to begin with.

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