Tools for decision analysis typically apply probability or other mathematical techniques to new business opportunities. These tools provide a more in-depth look into the opportunities in hopes of arriving at better decisions. A few common tools for decision analysis include probability theory, graph theory, and game theory. Each method requires specific inputs in order for a company to receive an accurate result. Gathering data comes from internal and external sources with the company typically using surveys or computer programs to obtain the requisite data.
Probability theory makes use of different hypotheses in order to assess multiple decision options. For example, a company may have the opportunity to add one of three different new products to a currently successful product mix. The company gathers inputs like materials costs, supply chain methods, production time, competition, and other data for each new product type. Probability tools for decision analysis measure each of the products against the inputs and compute a percentage that relates to the success of the new product. Companies typically select the product that has the highest probability of success in terms of sales or profits.
Graph theory is a bit more subjective when compared to other tools for decision analysis. Under this method, companies create one of many different types of graphs that allow for a physical display of decision outcomes. Each input has representation for each outcome. Companies draw connections between the various items on the chart and look for decision outcomes that increase revenue or profits. Two common types of graph theory charts are influence diagrams and decision trees, both of which represent inputs and alternatives in slightly different manners.
Game theory is a model for strategic decisions; the purpose is to decide how one company should act based on the decisions of another. In terms of tools for decision analysis, game theory works best when there are at least two strong competitors in a given market or industry. The normal form for this theory states that each company has no idea how the other will act or react. For example, one company’s actions may be to price goods higher in the market, while the other prices goods lower. A company creates charts that represent these actions and others in order to decipher the results.
Other tools for decision analysis are available too. Their use depends on both the business’s operations and needs for decision analysis. In some cases, decision analysis is unable to provide all the answers to a company’s questions. This is the result of actual outcomes not going exactly as planned on paper, usually due to unforeseen factors affecting the decision.