The RapidKnowHow Process : Making Decisions
Business Leader > Making Decisions > Deciding Best Course of Action > Alternative A or B > Overview > Strategic SWOT Analysis > Risk-adjusted Net Present Value > Conclusion > Get started in 3 Steps
Below, I’ll outline a structured approach for a business leader making decisions between two alternatives, using strategic SWOT analysis and risk-adjusted net present value (rNPV), followed by a conclusion and actionable steps.
Business Leader: Making Decisions
Overview
When faced with a decision between two alternatives (A or B), it’s crucial for business leaders to systematically evaluate each option.
This involves understanding the strengths, weaknesses, opportunities, and threats (SWOT) associated with each alternative, as well as assessing their potential financial impacts through risk-adjusted net present value calculations.
Strategic SWOT Analysis
1. Alternative A: SWOT Analysis
- Strengths: Identify what advantages this option has over others. Consider factors like unique resources, strong customer relationships, or operational efficiencies.
- Weaknesses: Evaluate the internal limitations or challenges. This might include lack of expertise, higher costs, or resource constraints.
- Opportunities: Look at external factors that could enhance the option’s performance. This could include market trends, technological advancements, or regulatory changes.
- Threats: Analyze external challenges that could negatively impact this alternative. Consider competition, market volatility, or changing consumer preferences.
2. Alternative B: SWOT Analysis
- Strengths: Determine the advantages of this option compared to A. What differentiates it in the market?
- Weaknesses: Consider the downside risks. Are there any fundamental flaws that could hinder execution?
- Opportunities: Assess what market conditions or trends could benefit this alternative.
- Threats: Identify potential risks in the external environment that could adversely affect this option.
Risk-adjusted Net Present Value (rNPV)
Once the SWOT analysis is complete, the next step is to calculate the rNPV for both alternatives:
- Identify Cash Flows: Estimate the cash inflows and outflows for both options over the projected time frame.
- Adjust for Risk: Incorporate probabilities for different scenarios based on the SWOT analysis insights. This may involve adjusting cash flows by likelihood of success or failure (e.g., conservative, moderate, or optimistic forecasts).
- Discount Rate: Select an appropriate discount rate that reflects the risk profile of each alternative.
- Calculate rNPV: [ rNPV = \sum \frac{CFt}{(1 + r)^t} ] Where ( CFt ) represents the cash flows at time ( t ), and ( r ) is the risk-adjusted discount rate.
Conclusion
After performing both SWOT analyses and calculating the rNPV for each alternative, compare the results. Consider not just the quantitative outcomes but also qualitative factors, including alignment with long-term strategic goals, company values, and stakeholder impact. Make an informed decision based on a holistic view of both alternatives.
Get Started in3 Steps
- Perform SWOT Analyses: Gather your team and collect data to complete the SWOT analysis for both alternatives thoroughly.
- Estimate Cash Flows & Calculate rNPV: Work with financial experts to project cash flows and calculate the rNPV while adjusting for various risk scenarios.
- Make the Decision: Review the findings from both the SWOT analysis and the rNPV calculations, hold a decision-making meeting with key stakeholders, and take decisive action based on comprehensive insights.
This structured approach will help business leaders make informed decisions rooted in strategic thinking and financial analysis.
