Purposefully approach your most perplexing decisions.
- When it comes to long-term decision-making, SWOT analyses and other methodologies are frequently used to organize the thinking of business owners and managers.
- Additionally, formal decision-making processes can assist leaders in avoiding typical fallacies such as extrapolation or sunk cost bias.
Decision-making happens at every level of an organization, progressing in a pyramid-like way from routine daily decisions made by low-level staff to far-reaching CEO decisions that may take years to deliberate.
Such decision-making can be classified according to whether it is programmed or unprogrammed. Numerous judgments will be programmed and implemented by an employee in accordance with some type of rulebook or corporate policy. However, it is the non-programmed decisions that might have a considerably greater impact.
We’ve detailed decision-making approaches to assist you in weighing your alternatives.
Five decision-making steps
While several entities ranging from academic institutions to advice websites have sought to reduce the decision-making process into a sequence of five to seven phases (the University of Massachusetts-seven Dartmouth’s fundamental processes are frequently referenced), they all follow a similar format:
- Determine your objective. This may seem self-evident when it comes to personal objectives, but when it comes to company goals, the more stakeholders, the more likely your goals will be mismatched.
- Collect pertinent information. This entails determining appropriate courses of action, identifying viable alternatives, and conducting study on both.
- Consider your alternatives. Decision-makers must now assess the evidence.
- Make your selection.
- Evaluating your choice. This encompasses both short- and long-term assessment.
Instruments and procedures
With the majority of decision-making activity concentrated in the second and third phases above, there are also hundreds of tools and approaches for organizing your ideas throughout these stages. We’ve compiled a list of some of the most popular choices:
A decision matrix enables you to analyze all of the possible outcomes of a choice. Create a table with all the alternatives in the first column and all the factors affecting the decision in the first row when utilizing the matrix. Following that, assign a score to each option and choose which criteria are more important. After that, a final score is calculated to determine which choice is the best.
T-Chart — This chart is used to compare the advantages and disadvantages of various choices. It guarantees that all relevant factors, both good and negative, are considered while making a decision. This is often referred to as developing a list of advantages and disadvantages.
Decision tree – This is a graph or model in which each choice and its associated consequences are considered. This approach is also used for statistical analysis.
Multivoting – This is utilized when a decision is made by a group of individuals. It assists in narrowing down a big number of possibilities to a manageable group and, ultimately, to the final selection.
Pareto analysis – This approach is advantageous when a large number of decisions must be made. This assists in prioritizing which decisions should be made first by identifying which will have the largest overall impact.
Cost-benefit analysis — This approach is used to analyze the financial consequences of each conceivable choice in order to decide which one makes the most economic sense.
Conjoint analysis – Business executives utilize this technique to ascertain customer preferences while making judgments.
SWOT Analysis – SWOT stands for strengths, weaknesses, opportunities, and threats, and this planning technique evaluates all of these factors.
Analysis of PEST Factors – PEST is an abbreviation for political, economic, social, and technical variables. By studying external influences, it is possible to enhance decision-making and timeliness. This strategy takes current trends into account in order to forecast future ones.
These tactics are not without their detractors. “I’ll be really candid and say that 99 percent of theoretical management models and tools aren’t all that useful,” said Pete McAllister, a business graduate who now operates an SEO firm, OutreachPete. “It’s all common sense knowledge that requires additional extrapolation… attempting to map it out at a higher level is shallow.”
McAllister’s decision to blog about post-corporate life on his website Recovering Commuter may be indicative.
Other corporate executives have indicated that similar techniques are beneficial for group analysis. “[They] enable the group to come to an agreement on the present situation,” Robert Stephens, creator of CFO Perspective, said of the SWOT and peer studies he has performed at various firms for which he has worked.
Additionally, they assist everyone in comprehending any underlying assumptions underpinning proposals, Stephens noted. “These tools are more beneficial as instruments for communication than for decision-making.”
Occasionally, decision-making tools are required merely to get things started. “I believe they are common sense… when I initially started my business, I did not apply them,” Adele Alligood, financial planner and creator of EndThrive, explained.
Nonetheless, “It felt as though decisions took an eternity to make. Our sessions lacked focus and squandered time “According to Alligood, this prompted her to include decision trees and Pareto analysis into her decision-making meetings. This was beneficial. “We stopped repeating the same debates and began developing action plans around the most critical choices.”
Fallacies in decision-making
A systematic decision-making process may also help your business avoid being led astray by fallacy – which is frequently the consequence of poor judgment or a lack of forethought. These fallacies are under the topic of intuitive decision-making in the subject of behavioral decision theory, which investigates the distinction between objectively logical and (sometimes irrational) intuitive decision-making.
“Decision-making myths abound in businesses of all sizes,” Stephens explained. Sunk cost bias is one form of this, in which irreversible investments are used to justify future actions, resulting in greater suffering (see the US’s refusal to withdraw from the Vietnam War).
Stephens used the example of a customer who was selling their firm in order to pay off debt and invest in it. They were selling it on the basis of predicted performance, not market worth. The price was too expensive, and no one was interested in purchasing. “I emphasized that such figures represented sunk expenses that were immaterial to them and the customers,” he explained.
Another example is extrapolation bias, in which current trends – such as an increase in property prices – are projected to continue in the same direction, a misconception frequently seen in finance by Stephens.
The discipline of behavioral economics is replete with instances of how widespread beliefs result in substantial financial loss – Stephens elaborated on numerous more in this blog post.
Best practices for employees
While financial decisions may be objectively examined, there is currently no economic model for moral decision-making. This becomes much more difficult when workers are required to serve as decision-makers, since they are more prone to act on personal financial incentives than on what is best for the organization as a whole — morally or financially.
This is where implementing a best practice for decision-making might be beneficial. Stephen Schwartz, CEO of Varfaj Partners, described it as a “pseudo-Kantian framework for office decision-making.” The policy has specific imperatives, such as under promising and overdelivering, price transparency, and self-accountability, and it governs all team members’ decision-making.
“While the answers presented by these imperatives are straightforward from a moral standpoint, I have discovered that this framework effectively eliminates individual or financial prejudice and cruel business practices with clients,” Schwartz remarked. “This framework enables team members to think in terms of a value system distinct from their own, enabling them to make holistic decisions that benefit both the firm and themselves.”