Making good decisions is highly challenging. Difficult choices with far-reaching implications often have to be made very quickly, with limited information, and in the face of disagreement about the best course of action. Complicating this further, decisions are not made in prejudice-free or value-free vacuums but are heavily affected by many cognitive, emotional, and organizational factors and dynamics. This Special Series on Decision-Making will comprehensively examine individual and corporate decision-making processes and explore how they can be improved.
The Decision Stream
Consider four scenarios:
- It is your first week at work. You are working at your desk, trying to finish an important presentation. The President of your company comes into your office and asks you to help him. What do you say to the President?
- You have been with the firm for three months. An opportunity has arisen for you to make a business pitch to one of the largest companies in your industry. You do not feel that you have the experience to make the pitch, but if you can win the business, it will significantly impact your career. What do you do?
- You have recently been promoted to be the head of accounting. The firm is preparing its budget for the new year and must decide how to allocate funds between new hires and new technology investments. How would you work through this issue?
- You are the CEO of a company. The company has a great business model, team, and client base, but the firm is currently under significant financial pressure and may have difficulties meeting payroll in the short term. The firm has been approached by a competitor who has offered to buy the company at an attractive price. How would you respond to the competitor’s offer?
While each of these situations is different, they have in common the need to make a decision. Life is comprised of a never-ending stream of opportunities to decide.
Individual Decision-Making
One of the defining features of the human species is its ability to make complex decisions. While external factors are often critical and can override even the best decisions, our choices significantly determine the path that our lives take. These decisions define whether we act in the face of different situations and, if so, when and how.
One of the defining features of the human species is its ability to make complex decisions.
A decision is a bridge that connects possibility and reality. Each moment presents an opportunity for a vast range of decision-making options. While decision-making ability is affected by different boundaries, the most straightforward situation can be the basis for many different outcomes. These outcomes, moreover, are not unrelated. Each outcome is a stone in a path that leads in a direction. Over time, the slightest differences in these paths at the outset can lead to a progressively widening distance between one reality and another.
Corporate Decision-Making
Companies are the sum of the decisions that they make. These decisions affect:
- where companies set up their business
- what strategies companies adopt
- how companies execute their strategies; and
- how companies deal with different types of internal and external situations.
Corporations are the sum of the decisions they make.
Corporate decision-making directly impacts corporate value. While many people think of corporate value, they think of the company’s assets or its cash flows. Yet, the key driver of a company’s value is its decisions. Good decisions can convert even bad situations into value-creating opportunities. Bad decisions can cause even great companies facing ideal situations to fall into ruin.
The Decision-Making Process
Given the importance of decisions, a key objective for every person and company is to determine how to make the best decisions possible. Since there is no such thing as an objective optimal decision, the goal of the decision-making process should be to reach the best decision possible given resource and time constraints.
The goal of decision-making should be to make the best decision possible, given the constraints of time and resources.
The decision-making process has several parts.
Decision Type. There are many types of decisions. Accurately categorizing decisions is important to determine:
- who needs to make or approve the decision
- the resources necessary to make the decision; and
- how quickly the decision needs to be made.
The first way to categorize a decision is based on its importance. This includes, on the one hand, decisions of a routine nature that will likely not have a major impact on the firm. On the other hand, it refers to decisions that can significantly affect the company’s strategic position, operations, or value.
The second way to characterize a decision is based on the area the decision is in. For example, for individuals, this could include decisions that affect our career, finances, health, or relationships. For companies, this could include strategic, tactical, or operational decisions. Decisions could be further broken down into different work departments or functions.
A third way to characterize a decision is based on what type of decision is required. This could be a simple yes or no decision or one that requires an extensive action plan with multiple steps.
Decision-Making Inputs. The second component of the decision-making process is decision-making inputs. These are the factors that serve as the basis for making the decision. These inputs include:
- the decision-making context
- the facts on which the decision is based
- decision-making objectives; and
- any limitations on the decision-making process, such as time.
Decision-making inputs include the quality of the information that is provided to decision-makers. If the decision-making circumstances are misrepresented to decision-makers or the facts that are presented are inaccurate, it will not be possible to make an optimal decision.
For example, if information about the company’s potential revenues is wrong, it will negatively affect the company’s ability to make a decision about its future financial and operational needs.
Decision-Making Process. The third component of the decision-making is how decisions are reached. This has multiple issues, including:
- who the decision-makers are
- the decision-making pathway, including what approvals are required; and
- how decisions are made, such as by one person, majority vote or unanimously
A key element of the decision-making process is factors that affect its effectiveness. This includes:
- whether the people participating in the process have sufficient expertise
- whether the time frame for making a decision is sufficient to allow all relevant information to be considered and an optimum decision to be reached;
- the presence of different types of bias that may affect the decision-making process.
Decision. The fourth component of the decision-making process is the actual decision made. In this part of the decision-making process, there is room for great variation between one decision and another and space for great creativity. This variation often makes the differences between a poor and a great decision.
For example, assume that an employee is not performing well in her position. If a simple binary decision-making approach was applied in this situation, it could lead to her either being left in her position or firing her. These outcomes may not be in the interests of the employee or the firm.
However, many other outcomes are possible if one goes beyond a binary decision-making approach and includes a wider set of options. For example, one could provide additional training or perhaps even move the employee to another position more suited to her skill set. While this type of decision takes more time and requires decision-making resources, the result may be the best for the employee and the firm.
Decision Review. The fifth component of the decision-making process is analyzing the decision’s impact. Dedicating time to post-decision analysis, particularly for key decisions, is crucial to determine how effective the decision was and how it could be improved in the future.
A systematic review of a decision’s impact is crucial to improve future decisions.
The decision-making review should consider:
- How well did the decision resolve the issue that was addressed?
- Was the decision made on time? If not, why?
- Were resources needed to implement the decision less or more than expected?
- Did the decision improve business results, create operating efficiencies, or build corporate value?
- Did the decision lead to an outcome that furthers the firm’s core vision, mission statement, and values?
If this process is carefully carried out, even poor decisions can become opportunities for individuals or firms to make much better decisions in the future. If decisions are not systematically analyzed, there is a risk that sub-optimal decisions will be repeated over and over again. This is particularly true for firms with high turnover where firm decision-making history is not well preserved.
Conclusion
This article discussed the importance of decision-making and broke the decision-making process into several parts. In the coming articles in this series, we will use this framework to explore how individuals and companies can make better decisions. We will also consider tools that help make better choices, such as data science and artificial intelligence.
The image for this article came from here.
Hi Darin, the matter is of great importance and concern for me: somebody in my position has to make a couple of strategic decisions which could go really wrong twice a day on average; and the decision process is painful, sometimes you would ask the person next to you at the bar what they would do, just to intermediate a little, and sometime you do that. if there were a manner to structure the process I think it would be beneficial to people like me.
I guess I’ll have to read the following episodes.
Hi Stefano thank you very much for your comments. You highlight a key decision-making dynamic. It is really interesting how often people are required to make strategic decisions and I agree that it is important to try to create a framework for making the best decisions possible. Without a framework, many people default to informal decision-making support which may or may not provide objective advice that leads to ideal decision-making outcomes. I will be sharing some thoughts on decision-making frameworks in upcoming articles it would be great to get your thoughts and comments.
Highly consider that decisions should be made for the best interest and spirit of the business, not out of ego. Even if you make a decision out of ego and it was fortunately the right one business wise, it will eventually catch-up and your luck will run dry. Focus on always the best outcome of the business and when making a decision even the smallest and what seems to be inconsequential, one must attempt to always make decisions with this mind-set because eventually it will impact the entire Company. Also, you well develop an amazing habit of decision making which will eventually effect the bottom line, One of many ways to develop this decision making habit is asking oneself why am I making this decision and not under any pretense. This is truly very challenging to achieve with so many factors effecting decision making but that is the goal. And when making decisions “right or wrong” stand by them not with fear but with curiosity and responsibility of your decision making actions. Darin this was an amazing article it truly opened up a lot of interesting perspectives on decision making. Thank you for your time in writing this subject line….It helps us all in understanding this matter at a deeper level.
Rocco thank you for sharing these great insights. You are definitely right that when making decisions we have to ask ourselves what the real objective of the decision is and whether our decision will further that objective. To make decisions that are positive for ourselves and companies, they should resonate with our personal as well as corporate values or else it is likely that the decisions will not be implemented. I also really liked your points about the importance of the impact of even small decisions and of standing by our decisions “with curiosity and responsibility.” This type of attitude is much more likely to successfully implement decisions or positively adjust them rather than blaming others if things do wrong. People and companies could really benefit from holistic decision-making approach you are describing.