5/30/2004 | 4 MINUTE READ

Making Decisions: How Much Info Is Enough?

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Being primarily in the business of market research, we could reasonably be expected to be consistent cheerleaders on the side of making decisions based on large amounts of data, preferably obtained by com-missioning $100,000-research projects. Since we are pragmatic consumers as well as purveyors of information, we have a different view. The appropriate amount of information needed in any decision-making situation is a function of many factors, including:

* How far-reaching the implications are

* Whether it involves a new field or is a matter in which there is some background knowledge

* How critical a fast decision is to the success of the venture

* The style of the decision-maker

Given that there is always a trade-off between time, money, and amount of information, it is worth thinking about some guidelines to the question of “how much is enough?”

For some companies, the question of how much research to conduct is a no-brainer because the answer is always “None.” These companies choose to operate solely on the basis of past experience, with no deliberate learning activity. Over time, they are likely to be passed by in favor of suppliers who embrace new ideas, identify and target the best customers, seek extensions for their capabilities, and are aware of their competition.

At the other end of the spectrum are the companies that want perfect information. These companies seek a level of detail on costs and prices that is not knowable in a free market economy. They want customers to articulate unmet needs, disregarding the fact that while customers can provide information, it is up to the supplier to turn that into insight. Some companies want to know all the cards in everyone else’s hand as a prerequisite to taking action. The quest for perfect information demands the highest investment of time and money and ignores the law of diminishing returns.

Somewhere in the middle are successful companies whose leaders combine superior business judgment (a key success factor for top executives) with some measure of information and analysis to create a state of informed intuition. The business press is full of laudatory stories about industry lions with a great depth of knowledge and golden gut instinct.

Useful Information forDecision-Making

So where is the balancing point on this spectrum? How much is enough? Here are a few general rules.

Enough to have a frame of reference. Having a baseline of knowledge is what enables people to retain and use information. Say you are a stamping company with no knowledge of suspension systems. A mention in the trade press of a control arm contract award to Hayes-Lemmerz might not make any impression on you even if you happen to see it. But if you have some knowledge of the landscape of suspension component technology and suppliers, such an announcement might signal a market shift from stamped to aluminum control arms that will affect two of your key competitors. Data points are cumulative and useful when you have a frame of reference to plug them into. Building that framework over time feeds your ability to make decisions quickly.

Enough to know the direction and pace of change. Sometimes the most pertinent information about a market is not what it is like now, but what is likely to be different in the future. Let’s say you are considering the acquisition of a firm that has a substantial position in brake fluid reservoirs. The degree of attractiveness of that business depends, in part, on the speed with which the automakers introduce brake-by-wire systems that eliminate the hydraulic elements of the brake system. How they roll out intermediate steps such as electrohydraulic systems and at what point fully electronic systems become acceptable to the public have at least as much relevance to the acquisition decision as current market size and market-share data.

Enough to characterize the competition according to positioning and marketplace perception. As we have noted in the course of our surveys on the topic of price reduction requests, making decisions about how to respond to a customer is facilitated by a good mental model of where your competition stands. In gaging what the customer’s alternatives to your product are, it is less important to know whether Competitor X’s market share is 25% or 30% than it is to know its capabilities for comparable quality and service, its philosophy about the importance of this product line, and its interests in this customer.

Enough to form a working hypothesis—Companies need to not only obtain data, but to think of it as a picture or a story: an integrated set of facts that allow you to develop a point of view about how that market works. It is this analysis that allows a company to cap its market data by filling in the “So, therefore…” part of the sentence and deciding how to act.

Fact-based decision-making is critical in today’s unforgiving business environment, but it does not guarantee the outcome. You can operate in a market successfully without having every last nanobyte of data at your fingertips, and conversely, you can make decisions that lead to negative results even when you have robust and thorough data. Information can be a coping mechanism that lays a semblance of certainty over a very complex set of interactions. One of the many challenges for management is knowing where to draw the line on information-gathering and move forward with execution.




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