Fifteen minutes and one second from now, you will make an uninformed business decision.
Not for lack of trying, of course, but because after fifteen minutes you will give up. You will stop searching for insights.
Somewhere in your firm’s files, likely organized under some type of knowledge management taxonomy, is that one piece of information, that one crucial insight that can increase your chances of success in a meaningful and statistically proven way. You may even know where it is.
- Maybe it’s in last year’s forecast
- Maybe it’s your predecessor’s strategy, shelved since she left your firm for another opportunity
- Maybe it’s in that market research report commissioned last year
Wherever it is, no matter what the knowledge management tool at your disposal, you will give up.
“We proved this definitively,” notes Mike Malone, research psychologist and market research innovator during a recent interview. During a four-year R&D collaboration with IBM where “we were trying to define the next generation decision support systems, we found if the decision maker cannot get his or her hands on the requisite information in less than 15 minutes, they won’t use the tool. It seems sort of arbitrary but that’s pretty much it. It’s 15 minutes.”
Delivering the right insight to the right person at the right time presents more than a mere user experience challenge for designers of knowledge management systems. It presents an obstacle to the quality of decision-making in any firm. As Mike puts it, “the race is going to be who can optimize the assimilation of insight fastest and most effectively.”
Leaders make decisions based on habit rather than merit
“Leaders,” Mike continues, “often make decisions based on habit rather than merit. If you do an audit in North America and Europe, you’ll find that 80% of business decisions are not informed by objective data. They are disproportionately reliant on anecdotal data or a snapshot that is buried in a silo and often taken out of context. And these are decisions that can determine the success of an organization.”
Mike put into sharp relief the scope of our mission at Trefis, which is to support leaders who make decisions of consequence. If four of five business decisions are “not informed by objective data” then leaders need all the help they can get.
Here’s how Trefis helps. Our software platform transforms complex, static analyses-such as Excel-based data models-into easy-to-use, visual interactive experiences that let you develop “what-if” scenarios, assess the risk and reward of any decision, and engage stakeholders in meaningful discussions on the assumptions that matter most.
“Any decision you make is relative to a baseline of where you are right now,” Mike continued. “The essential question is, How will my decision impact the future? When applied to a concept such as price elasticity, the power of leveraging what-if scenarios–in combination with Trefis tool–becomes evident.”
For instance look at this screen shot from our Price Elasticity Model for ACME.
It depicts a baseline product / price mix across four products that,
- Generates $193 Million in total revenue
- With gross profits of $62.0 million
- 32.1% gross margins
- Against 827 units sold
Now click on “Product 3.” As you can see from this second image below, currently Product 3 contributes $103 million in revenue, through three distribution channels.
“What-if” we increase prices on Product 3 by 20%?
You might wonder: “What-if we increase our prices 20% on Product 3? What happens to our profits? Well let’s check it out. Do this yourself. Click here to open the model in another window)
- Dig deeper into “Channel 1” and you’ll see the “Product 3 Pricing Index” set a 1.0.
- Click through and slide the arrows up so the new index reads “1.2”
- The revenue and gross margin outputs on the left side update in real-time
- Total revenues and units drop (by 3.16% and 9.83% respectively), but both gross profit grows and margins grow (by 8.50% and 12.04% respectively).
“What-if” we continue to raise prices? Where do we fall off a cliff?
Keep adjusting the “Product 3 Pricing Index” and you’ll find that by simply dragging the arrows, profits begin to flatten, then fall after you increase the index to 1.75 or so . Play “what-if” as often as you wish, and save the scenarios under different tab names.
“’What-if scenarios’ is just street talk for the hypothetico-deductive method,” Mike says. “It means that you will approach the exercise in a disciplined fashion. You will articulate your assumptions, the parameters of your model, and then you will test and pivot. That’s the beauty. This method is the foundation of all science.”
We’ll have more from our interview Mike Malone in upcoming posts. If you’d like to learn more about how Trefis can help you make better decisions, contact us here.