- When it comes to long-term decision-making, SWOT analyses and other techniques provide a popular way for business owners and managers to organize their thoughts.
- Formal decision-making methods can also help leaders avoid common fallacies like extrapolation or sunk cost bias.
Decision-making occurs at every level of a business, advancing in pyramid-like fashion from the mundane decisions made every day by low-level employees to far-reaching executive decisions that may require years of deliberation.
Such decision-making can be divided along the dimension of programmed versus nonprogrammed. Many decisions will be programmed decisions, executed by an employee under some sort of rulebook or company guidelines. It's the non-programmed decisions, however, that can be so much more consequential.
We've outlined decision-making techniques that will help you weigh your options.
5 steps of decision-making
While numerous entities from academic institutions to advice blogs have attempted to distill the decision-making process into a series of five to seven steps (the University of Massachusetts-Dartmouth's seven basic steps is an oft-cited one), all more or less follow the same format:
- Identify your goal. This may sound like a no-brainer for personal goals, but for business goals, the more stakeholders, the more likely your goals are going to be misaligned.
- Gather relevant information. This includes identifying courses of action, identifying alternatives and researching both.
- Evaluate your options. At this point, decision-makers must weigh the evidence.
- Make your choice.
- Evaluate your decision. This includes both short-term and long-term evaluation.
Tools and techniques
With most of the work in decision-making condensed into steps two and three above, there are also dozens of tools and techniques for organizing your thoughts during these stages. We've rounded up some of the more popular options:
- Decision matrix – A decision matrix helps you evaluate all the options of a decision. When using the matrix, create a table with all the options in the first column and all the factors that affect the decision in the first row. Next, score each option and weigh which factors are of more importance. A final score is then tallied to reveal which option is the best.
- T-Chart – This chart is used when weighing the pluses and minuses of the options. It ensures that all the positives and negatives are taken into consideration when making a decision. This is also known as creating a pros and cons list.
- Decision tree – This is a graph or model that involves contemplating each option and the outcomes of each. Statistical analysis is also conducted with this technique.
- Multivoting – This is used when multiple people are involved in making a decision. It helps whittle down a large list of options to a smaller group to, finally, the eventual final decision.
- Pareto analysis – This technique is useful when many decisions need to be made. This helps prioritize which ones should be made first by determining which decisions will have the greatest overall impact.
- Cost-benefit analysis – This technique is used when weighing the financial ramifications of each possible alternative to determine what makes the most sense from an economic perspective.
- Conjoint analysis – This is a method used by business leaders to determine consumer preferences when making decisions.
- SWOT Analysis – SWOT stands for strengths, weaknesses, opportunities and threats, which is exactly what this planning tool assesses.
- PEST Analysis – An acronym for political, economic, social and technological, PEST can improve decision-making and timing by analyzing external factors. This method considers present trends to help predict future ones.
These methods have their critics. "I'll be honest and say that 99% of the theoretical management models and tools aren't actually all that helpful," said Pete McAllister, who has a degree in business and now owns an SEO agency, OutreachPete. "It's all information you know from common sense and still requires further extrapolation ... trying to map it out on a higher level is superficial."
It may be telling that McAllister now blogs about post-corporate life on his website Recovering Commuter.
Other business leaders say they found such tools useful for group analysis. Of the SWOT and peer analyses Robert Stephens, founder of CFO Perspective, has conducted at various companies he's worked for, "[They] allow the group to come to a consensus on the current situation," he said.
They also help everyone understand any underlying assumptions behind recommendations, added Stephens. "These tools have more benefit as communication tools than decision-making tools."
Other times, decision-making tools are needed simply to get the ball rolling. "I tend to think they're common sense ... when I first started my business, I didn't use them," said Adele Alligood, financial advisor and founder of EndThrive.
However, "it felt like decisions took forever to make. The meetings we had lacked focus and wasted time," Alligood said, which led her to introduce the decision tree and Pareto analysis methods into her decision-making meetings. This helped. "We stopped having the same discussions over and over, and we started coming up with action plans based on the most important decisions."
A formal decision-making process can also prevent your company from being guided by fallacy – often the result of gut decisions or a lack of planning. In the field of behavioral decision theory, which examines the separation of objectively rational decision-making and (often irrational) intuitive decision-making, these fallacies fall into the latter category.
"Decision-making fallacies are rampant in companies of all sizes," Stephens said. One example of this is sunk cost bias, in which irretrievable investments are used to justify future decisions, only to cause further harm (think of the U.S.'s unwillingness to withdraw from the Vietnam war).
Stephens gave the example of a client who was selling their business to cover the debt and investment they had put into it. They were selling it based on expected performance rather than actual market value. The price was too high, and no one was willing to buy. "I pointed out that those numbers were sunk costs that were irrelevant to both them and the buyers," he said.
Another example is extrapolation bias, in which current trends – such as a rise in housing prices – are expected to continue in the same direction, a fallacy that Stephens often observes in finance.
Employee best practices
While financial decisions can be weighed objectively, unfortunately, there's no economic model for morally guided decision-making. This becomes even trickier when employees must act as decision-making agents, where they're more likely to act on personal financial incentive rather than what's best – morally or financially – for the company as a whole.
This is where instituting a decision-making best practice can be useful. Stephen Schwartz, CEO of Varfaj Partners, referred to it in his company as a "pseudo-Kantian framework for decision-making around the office." The policy holds certain imperatives, including underpromising and overdelivering, pricing transparency and self-accountability, dictating all decision-making done by team members.
"While the solutions these imperatives present are intuitive from a moral perspective, ultimately, I have found that this framework has eliminated individual or monetary bias and malevolent business practices with clients," Schwartz said. "This framework allows for team members to think within a certain value system separate from their own and thereby make decisions holistically that benefit both the company and themselves."
Additional reporting by Sammi Caramela.