free world academy
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FREE
WORLD
ACADEMY
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NEW BIZ AD
NEW BIZ
ADVISORFW1 - Mental ImageryFW2 - VisioningFW3 - CreativityFW4 - Micro economyFW5 - Macro economyFW6 - GlobalizationFW7 - Real worldFW8 - Country ratingFW9 - Global trendsFW10 - Sector rating
FW11 - Business idea
FW12 - First sketchFW13 - Consumer analysisFW14 - Supplier analysisFW15 - Marketing mixFW16 - OperationsFW17 - OrganizationFW18 - AccountingFW19 - Financial statementsFW20 - Financial analysisFW21 - Cash flowFW22 - Business nameFW23 - Decision makingprocess1.Type of decisions2. Reactive decisions
3.Proactive decisions4. Follow up5. Do it yourself6.AuthorFW24 - Check up pointFW25 - CommunicationFW26 - NegotiationFW27 - Raising moneyFW28 - Project managementFW29 - ManagementFW30 - Strategy
FreeWorldAcademy
FW23-THE DECISION MAKING PROC
YOUR POSITION
Look at the Map
MAP
185 days before opening.1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4up 5. Do it yourself6. Coaching
INTRODUCTION
Time is coming to decide. Firstly, do you really decide to start your busin
a good example ofthe decision making process.
A businessman have to make decisions under the pressure of time and
circumstances. The decision making process is a key to leadership.
DurationLesson: 2,5 hours
External readings: 3 hours
Do it yourself: 5 hours
Total: 10,5 hours
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Objectives:The manager is above all, the man who decides. The decision making will show you:
-How to manage reactive decisions.
-How to manage proactive decisions.
Finally, you will have a toolbox for improving your decmaking process.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4
up 5. Do it yourself6. Coaching
1-TYPE OF DECISIONS
Facing a situation, you have to decide. For example, you are surroundedfire: What do you do? To jump through the windows and risk to kill yours
wait the firemen and risk to be burned to death if they come too late?
In this case, the choice to not act and to wait the firemen is also a decisi
itself. Unfortunately, many people are unable to decide: One day, they osolution and the next morning they opt for another. Indecisiveness plays
role in the history of many events.
Real life example:
The last famous example of indecisiveness is the shameful affair
Srebenica in former Yugoslavia: The representative of the UN andgeneral who commanded the UN forces had been unable to make
mind about the need for an air force support.
As a result of this indecisiveness, 7000 people were badly slaughIt's not sufficient to be able to decide. You must take the good deTaking a good decision is the crucial state because there is always a lot o
uncertainty about the future and about the action that other people can tthe decision making process aims to reduce this uncertainty.
Firstly, we shall distinguish different types of decisions: daily and gdecisions and then reactive and proactive decisions.
11-Daily and global problems
Very often the uncertainty can be managed thanks to knowledge a
training. When you drive a car you take ten decisions per minute and yo
them automatically because you have been trained. In the same way,
business decisions just require knowledge and training.
For example, problems such as "What to do if my sales fall? "What to
register a loss?" "Do I must invest in this machine?" find their an
the knowledge. Regarding these daily matters, our program brings a loand best practices to learn and to apply.
It means that we only deal here with the global decisions such as: "D
a business: yes or no?" "Do I partner with John?" "Do I merge wicompany? Do I sell my business?" and so on. These global decisio
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the most important and unfortunately You will not find their answers in
However, You can improve your decision making process:For this purposshall provide you with sound advices and advanced tools.
12-Reactive and proactive decisions
Dealing with the decision making process, scholars and biz books recommadopt the following process: First, define the problem, Collect informatio
develop options, choose the best option, plan, execute, follow up and so
try to imagine the two following situations:
You head a travel agency and you make tourists traveling in mountains.
Suddenly one of your employees arrives in hurry and announces y
your bus with five tourists has collided another car. People are exto be dead or heavily wounded. What will you do? Do you intend t
the problem and to study the options with your computer?
Just imagine another example: you head a food catering company w
provides schools with meals. A TV journalist announces that threechildren have been transported to the Hospital and that the cause
to be a food poisoning. He calls you for an hot interview: What wisay, what will you do?
I mean that books describe only how to deal with proactive decisions s
start a biz, to partner or to merge. These decisions allow time for studyinoptions. On the contrary, the reactive decisions that you have to taka disaster do not allow any time. You have to act under the pressure and circumstances and of course such decisions are both the most impor
difficult.
Does it mean that there are no solutions? In fact, the method to deal such situations exists and we shall learn it to you.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4
up 5. Do it yourself6. Coaching
2-REACTIVE DECISION
Reactive decision must be carefully prepared in order to act quite
automatically when the event occurs.
A bad event with either a high or either a low probability is a risk. The fi
to carefully study the risks which could strike your business.
21-Risk assessment matrix
We shall use again our risk assessment matrix. You had yet draw
first assessment matrix in FW 11, but this new analysis enables yupdate the matrix.
211-Type of risk:
Each business is exposed to specific risks connected with its mainactivity. For example, Banks, currency traders and jeweler' are currentlyto hold up. It's not only a matter of insurance. It's a matter of life or dea
according how you react.
Business connected to chemicals, foods and drugs are currently exposed
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poisoning risks, ecological threats and food diseases. Travel agencies can
exposed to terrorism in some countries. All biz are exposed to labor accidfire, earthquake, volcanic eruption, fraud and so on. In some countries, y
take in account civil wars, revolution and riots in urban areas.
You can be confronted with less dramatic events that can nevertheless be
catastrophic for your specific biz: For example, what happens if your supplier suddenly defects? What happens if your internet system
completely pirated and destroyed? What happens if airlines go towhen you have a lot of tourist blocked in some exotic countries?
All these events can never be planned. It is quite impossible to identipredict their chances:They occur suddenly and you have to decide sudde
212-List your risks:
In any preparation, the first step is to list your risks and their proTo simplify, just identify high probability and low probability.
For example, with growing insecurity, a criminal attack must be graded apossibility for any biz involved in money business or gem trade. On the c
a travel agency has a low probability to be confronted with a hold up.
The second task is to estimate the impact of the event. You can dis
the accident, the disaster and the catastrophe. With an accident, your bizon as usual. A disaster implies a long recovery and a catastrophe means
business is terminated.
The notation only depends on the impact on your own business: For
if you head a bank, a earthquake is less harmful than a simple hold up: Igeneral, banks have heavy walls and should not suffer to much from the
an earthquake!
According to the biz, the same event can be an accident or a catastrophe
example if your tourist guide is poisoned with the food , it's for you an ac
but for the food catering it could be a catastrophe because many people certainly be poisoned too.
You have also to take in account insurances. For example, a fire which is
stressing event should have in general a low impact because most of theinsured against the fire.
213-Establish your risk assessment matrix:
When you have finished this analyze, you draw up your risk assessmmatrix. Look at the next drawing.
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As you can see, it's an easy to use tool. You write in each square the
you have listed according to their probabilities and their impacts.
Whatever their low or high probabilities, all the risks that are full
insured could be put in the left part of the drawing: low impact. Hyou have to analyze: For example a burglary by night has a low impact b
insurance should pay. On the contrary, a hold up causing the death of cuand employees has a high impact: Of course insurance will pay but you w
nevertheless suffer of a moral prejudice and a bad impact for your image
Then you have to prepare yourself for taking decision.
22-Automatic decision process
Of course, you can never prevent these events to occur because zero riskexists. Nevertheless, you can reduce the probability of the risks.
-Firstly, adopt and implement some preventive measures: Reinforc
defenses of the bank. Have a good driver and maintenance for your tour
Have good anti virus for your internet site and so on. It does not prevent
but just reduce its probability.
-Secondly, according to your risk assessment matrix, establish themergency plans.
-Thirdly, you must be aware that once the event occurs, most peoin panic . In this case, the best plan becomes ineffective because peopleemotionally unable to apply it. It means that you have to prepare forof automatic decisions that everybody can follow up without havi
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think.
These prepared decision and automatic procedures will enable yolike an automat. Everything will be easier and you will face a crisis with
stress than when you are driving in a traffic jam!
Real life experienceYears ago, being in governance circles, I had have the opportunit
with automated and prepared decisions. In case of national emerhad just to open a file and to apply a list of prepared decisions: ca
call Y, call the airport, send this message to Z with the following cso on.
Everybody along the chain of command knew what he had to do wreceived the message. Nobody commented or asked questions. It
really a fully automated procedure.
For example, an automated procedure should be required in our first tou
example. The worst appears when you do not know exactly the nature an
spread of the event. For example, an animal is contaminated, is all the hcontaminated too? In this case the principle of cautiousness shouldcommand to launch the emergency procedure.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4up 5. Do it yourself6. Coaching
3-PROACTIVE DECISION
Fortunately, proactive decisions are more frequent than reactive decision
recall you that daily business decisions and solutions rely on well known
you will learn in the further modules. Once again, I precise that we are odealing with global decisions.
The decision making progress implies a phase of preparation andof execution.
31-Preparation:
Preparation is a must. You know the event:("Do I start a business or nyou do not know the consequences: Is it a good decision? What are the
probabilities to do well or inversely to be impoverished?
311-Define the problem:
In any problem, you have to establish the causes and the symptoms. Kno
causes, you can recommend a solution just as a doctor does.
Unfortunately, most often there are different possible solutions such as AC. What is more you do not know the chances of success of A, B, or C!
312-Collect information's:
One way for reducing uncertainty is to collect information's. For example
partner with company A? This company can be good, medium or bad. Foreducing this uncertainty, you can collect information's from your bank o
sources.
Unfortunately, sensible information's are not on the market place and req
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enter in the domain of intelligence .
Down earth advice
It means that you have interest to make friends with people whospecific information's. Once you have started your business, pay
courtesy call to the local police officer, or the local attorney.Focus on people who are likeable and who talk easily. You can co
from them some sensible information's. Invite for having lunch thjournalists. These people like to talk!
Thanks for information and intelligence, you can reduce uncertainty. It mexample that among three consequences of your decision, one should ap
more probable. For example, company A is not a good company.
313-Assess the consequences of each option
You must also intensively investigate all the consequences of your decisio
suppose that your decision could have three outcomes: one very good (Agood (B) and one bad (C) with equal probabilities. In this case, your dec
should have 66% of chance to be a good decision.
Now examine more carefully the possible consequences: With A, you win
with B you win 30 and with C you get a death penalty! In this case theconsequences of C are out of proportion with the benefit that you can ex
why most criminal activities are risked!
Real life example
Since chernobyl, we can assume that implementation of nuclear p
plants near big towns correspond to bad decisions because an acwhatever its low probability, should result in disproportionate los
compared with the expected advantages.
314-Define your options and the best alternativeBe careful about the idea to multiply the options. It could be a poor excu
never taking any decisions. Too much options kill the decisions and risk tan infinite process of brainstorming.
Down earth advice:
When people are entering in an unlimited thinking process in orddelay the decision, apply Andy Warhol's maxim : Do not think-Act
Business books always recommend to have a best alternative. It mean
you must have a contingency plan if the decision gives bad results.
Regarding your contingency plan, keep it secret! The best way to mpeople is to say them that there is none contingency plan: Remember t
odyssey when Achilles burns his vessels. He means to his troops there is none contingency plan and that the only issue is to win o
Finally, you can also temporize when a decision is not mature. A decnot come to maturity when you do not know all the elements of the situa
when you do not understand something. Once again, it must not be afor postponing any difficult solutions!
External readings:
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To illustrate this process in a detailed way, go to the University o
Wisconsin-Madison: www.ies.wisc.edu. Click on "Search our web then write "econaes" in the window and submit it. Then click on
"WRM2000-Decision making process". You will find a fascinating about the decision to repair or to remove a dam.
I know that you do not intend to built dam or power plant but thigives a pleasant and extensive description of the decision making
and notably its preparation phase.
32-Execution: Quantitative analysis, decision tregrid analysis.
Once your preparations are finished, you have to decide. We shall provid
with different tools that can help you to make the better choice.
These tools are linked to the quantitative analysis and the probability
not be afraid. You do not need to be an expert in mathematics or statisti
shall make it easy in following a very simple case and what is mo
own case: The decision to start or not to start your biz.
321-Case study: Quantitative analysis
To start a biz is a decision. To not start is another decision. Indecisivenes
be one day to decide to start and one another day to decide to do not. Wexamine how to make a choice between the two decisions.
After analysis, you have gone to the conclusion that each of these two decould have three consequences. If you start a biz (decision A) you could
money that is to say 500, you could also get little money: 100 and you cimpoverish yourself: -200
If you decide to do not start there are also three consequences: You keepactual salary: 100, you improve your salary with time: 200. You lose you
find another job paid only 50.We can sum up these elements in the following table
-----------------------START A BIZ----------- NOT START
Best event -----------------500----------------- 200
Medium event---------------100----------------- 100
Worst event--------------- -200------------------50
How will you decide:
First situation: you have not any idea about the relative chances of eac
It means that you are confronted with a pure uncertainty and in this cachance of each event is about one third that is to say 33%. That is that w
flat probability as shown by the following drawing:
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In this case, in each rank, you multiply each expected value by 33% and
up the results:
START: (500*33%)+(100*33%)+(-200*33%)= 165+33-66= 132NO START:(200*33%)+(100*33%)+(50*33%)= 115,5
You have to choose START because the expected value is higher t
START.
Second situation: Now let's suppose that you can make reasonable ass
about your career: For example, you think to have 50% chance to improsalary and 25% for the two other events.
In this case, the line NO START should become:
(200*50%)+(100*25%)+(50*25%)=137,5
In this case, NO START should be a better decision.
It means that when you make a preparation and collect information's youreduce the uncertainty and reach a probability which is illustrated by thfollowing drawing.
One event has a better probability to appears that the others
Third situation: Now you will assume that thanks to deep preparation, better assess the probability of START. For example, as you have intensi
how to start a biz you, you can expect a probability of 60% for the best e
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30% for the medium and 10% for the worst.
Moreover, you realize that you are employed in a public service. By lack relations, your chances to improve are very weak, maybe 10%. Inversely
chances to lose your situation are quite nil's, may be 2%. It means that medium has a probability of 88%. It is called a deterministic probabili
The following drawing illustrates these new situations:
Now we shall make the calculations:
START:(500*60%)+(100*30%)+(-200*10%)=310
NO START:(100*88%)+(200*10%)+(50*2%)=110
The decision is easy. Start is the best decision.
No matter the real subject, the interest of this method is too show y
a good preparation enables to reduce the uncertainty and to imprfacilitate the decision process.
You can object that all is based on the figures used to show the expe
incomes: (500, -200, 100; why not 1000, 300 or -500?) and on the figuprobability: why 50%? Why not 90%?
The expected incomes are based on your own market study and your owcalculations regarding your profitability. According to different hypothesis
you can effectively get different pictures. All studies make sensibility testto estimate the best, the medium and the wrong. I could say that ther
not too much uncertainty about the expected incomes figures.
The probability of the event (30% or 60%) can be also well assescourse, these probabilities must not be based on your optimistic or pessimmood!
Real life example
I had fun in reading a famous biz book where the probabilities webased on the psychological profile of the investor: Optimistic: you
60% for the event. Pessimistic : you only allow 40% for the even
Of course doing like that is a pure loss of time. You should have b
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throw a coin and to play at heads or tails!In fact your assumption regarding the probability of any event must rely probability laws and not on your mood.
The probability laws show that for many events, we obtain a normdistribution of probability which allows us to make sound expecta
regarding the future. In this domain, the most fascinating tool is curve.
322-The bell curve
Come again with our probability about your salary in a public service. Foexample, let's suppose that 40 years ago, 1000 individuals have entered
company exactly the same day and with the same diploma. Then, you extoday at what hierarchical level they are arrived. Suppose that this comp
only five hierarchical levels graded from the lower A to the higher E.
According to this hypothesis, you are quite sure to obtain in any public se
following distribution: A: 5%, B: 15%, C: 60%, D: 15%, E: 5%. You putresults on a graph and you obtain the following curve:
This is the bell curve; It's a fundamental statistic tool: The bell curva normal distribution of the probability. It shows that in this case you ha
of chance to be somewhere between B and D.
The Bell curve is astonishing because it describes with the same probabil
above a multitude of quite different events. It's not a mystery: It's just blarge number of independent samples entering in the same situat
( Here the company) always tend to a central average.
It means that the same curve will describe the distribution of a student p
according to the diploma level or the distribution of the cyclists accordingrank on the finishing line. So when I said that you had 88% to get the sa
salary and to remain medium it was neither a fantasy nor the fact to be
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pessimistic. It was just the result of the bell curve.
Of course, you must not glance at this curve passively. Its just a toodecision. Consequently, use bell curve in your decision process and than
your preparation try to move yourself from the losing side of the the winning side.
323-Decision trees
Decision tree is a way for visualizing a complex chain of decisionsdecision leads to a new choice and therefore to a new decision that in tur
with a new choice and so on!
Let's go on with our example and look at the next drawing which illustrat
decision tree.
Let's suppose that you decide to start a biz. This decision is not submitteuncertainty and is represented conventionally by a square. Then you havchoose if you will follow up a training or not.
If you decide to do not, you go to a circle that represents an uncertainty it leads to three probabilities which are represented by three arrows. Con
the same % of probability and the same expected incomes than in our firexample, we know that the sum is 132.
Now if you decide to take a training, you have to pay its cost that is to sa
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There is not uncertainty about the cost, so you go to a new Square. Here
according to our previous example, you meet three probabilities: 60% fobest, 30% for the medium and 10% for the worst. The result of the calcu
310 but you have to substrate the cost of the learning (-100). The net rtherefore 210.
Now, let's suppose that a consulting group proposes you to realize a commarket study costing 150. Thanks to this study, you can highly improve
probabilities: 85% for the best, 10% for the medium and only 5% for theIt's quite a deterministic probability!
Now look at the results. Of course, you get 425 but going back on the trehave to deduce the cost of the market study (-150) and the cost of the
(-100). It means that the net result amounts only 175. Despite the incrthe success probabilities, you have better in this case to not order the m
study.
Be aware that when there is a long chain of decisions and events you sho
a computer program and a bit of time.
324-JudgmentThese tools are just good for preparing for a decision but they ne
replace a sound judgment.
Firstly, monetary value must always takes in account the time vameans that $1000 expected in five years have not the same value that $cash to day. It is the same for an expected loss, but be aware than a dis
threat is often more dangerous than an immediate one because its conseare more difficult to evaluate.
Secondly, you have to think about the utility of the supplementaramount of money: The utility of money varies according to the wealth.
example, suppose a man who owns $12 millions. If the expected monetais $2 million, he will not take heavy risks to get it. To have 14 millions ins
12 will not modify his way of living or social position. It means that the emoney has a low utility for him.
On the contrary, the supplementary money has a high utility for a poor mlittle money more, could enable him to have a home instead of sleeping r
could change dramatically his social position.
Thirdly, the monetary criterion can conduct to unreasonable decisFor example let's suppose that you have $1000. You invest it in gamblingheads win you get $4000 and if it's tails you lose your bet. You have to c
between gambling or not
Not gambling: you keep your $1000
Gambling: (4000*50%)+(-1000*50%)= 1500The best statistical decision is to gamble but it may be a very unreasona
decision if you have only $1000 for ending the month. In the same way yto look at your risk assessment matrix. Sometimes high probabilities of p
connected with unacceptable non monetary risks.
Real life example
I knew in Guyana some businessmen who were making big mone
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gold placers. However, they risked their life everyday in strugglin
the "seringueros"(Illegal miners seeking for gold in forest).
In the same way, it seems that many world telecom leaders have
unreasonable risks. They are now facing criminal charges for frauObviously they had omitted to computerize such risks in their dec
trees!
External readings
Go to www.mindtools.com Click on "techniques for effective decis
making" and then on "decision tree". You will find here a complexdetailed example of decision tree.
Go to: ConceptDraw MINDMAP: mind map software
325-Grid analysis
Most decisions in business result in money but some of them deal with n
monetary issues.
Let's suppose that you have to choose a location for your business either
A or either in town B and that the two locations are equivalent regardingmonetary outcome. In this case, you fill up a matrix and you indicate the
advantages (benefits) and disadvantages (costs) of each location (for expleasant environment, good schools, good shops and so on)
Then you attribute a note from 1 to 5 or from -1 to -5 to each elements. the notes and you see the best result. It's quite like the "cost benefits" a
but with notes instead of money.
COST BENEFIT RESULTSDecision A -30 16 -14
Decision B -8 37 +29
B is shown as the best solution
326-Vision
Finally, if your decision is really difficult, recall your ultimate tool :
Vision yourself taking the decision A and then taking the decision
will choose according to the pleasant or unpleasant result given bvision. It's another way to use your intuition.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4up 5. Do it yourself6. Coaching
4-FOLLOW UP
Once your decision has been taken, you have to share it with you
and maybe your suppliers and customers
Be aware that in most organizations, any change is perceived as a dange
result, any decision could bring oppositions. The first thing you have to dvalue the strengths of your allies: people who are supporting the decision
those of your opponents: people who are disturbed by your decision
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41-Field force analysis
A good tool to value these strengths and weaknesses is the field f
analysis. It's just like the grid analysis: you grade with notes the opponthe supporters. Then you establish the following drawing:
As you can see in this example, the suppliers do not like your decision.
general, they have their habits and a change disturbs their channels.
Of course, the labor unions and the low staff are absolutely again any chthe employees are opponents, the human resource manager will be too: not want to be in trouble because of your decision!
Finally, the operation manager does not support the measure because it modify the assembly line and he does not like it.
Then, you sum up the note of the opponents and you get 14.
On the other side, the sales manager backs up your decision because it b
value to the customer. The finance manager does too because he hopes increase in profitability. Finally, among the medium management, you on
the support of a creative and non conformist maverick!
The sum of your good notes amounts 8 against 14. It's not too m
it's nevertheless the more frequent situation!Do not worried about that: knowing this analysis, you have to take meas
comforting your supporters and for persuading your opponents: communpersuasion and finally authority are the best tools for this purpose: Try t
persuade your operation manager because it's a key executive. H
benign neglect for the human resource manager. Say to the staff doors are fully opened and threaten the suppliers in announcing t
are going to supervise all their contracts!
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Down earth advice
I have read in some biz books that the field force analysis was a t
making a decision. It's a big mistake.
As people are often opposed to change, be sure that you will neve
any decisions if you just follow the results of a field force analysisThe field force analysis is just a tool to follow up a decision.
42-Participation
It is often said that the best way for implementing a decision and a chancall for meetings and to implicate people in the process. Of course you
communicate your decision but once again be aware of the fact th
people do not like to change and are mostly conservative ( bell cuagain!).
People are always screaming that they should be consulted. In fact, they
eager to participate for deciding the vacation planning, but when a crisis you are strangely alone for bearing heavy responsibilities. Remember tha
boss is like the captain on his boat.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4
up 5. Do it yourself6. Coaching
Lesson summary:
You will have to take many global decisions.In all cases, preparamust.
You have to distinguish reactive and proactive decisions.
A reactive decision is taken for managing a risk. You must establi
assessment matrix based on the probability and the impact of eacfor your own business.
Then, you have to define an emergency procedure: It is a prepared decisions that you will execute once the event occurs. T
emergency procedure enables you to manage properly and to min
the expected impact.
Proactive decisions allow time and studies. They follow a decisionprocess including a detailed preparation based on information,
intelligence, evaluation of options and consequences, best alterna
The execution can use the quantitative analysis and notably the b
curve and the
decision trees.Non monetary decisions can us
analysis. Judgment and vision are always required.
The follow up of the decision can use a field force analysis.
Leadership is largely based on the ability to take decisions in cruc
situations.
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4
up 5. Do it yourself6. Coaching
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DO IT YOURSELF
Establish you tree analysis regarding your decision aboustarting a biz. Of course, take in account the fact that you are tra
1. Type of decisions 2. Reactive decisions 3. Proactive decisions 4
up 5. Do it yourself6. Coaching
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