Decision Making Techniques
Decision making is a fundamental part of business. It happens at every level of a business, in every function of a business. Some of the most common decisions that you may be familiar with are those decisions which are strategic, tactical, or operational in nature.
When we make decisions, we should have evidence that supports our decision. This is referred to as evidence based management. When we refer to ‘evidence’ we’re referring to any type of reliable information that can be found in the form of data or facts that explicitly affirm or deny the claim, assumption or hypothesis that we’re making or testing.
We can also draw this evidence from a number of sources, usually internal or external. Internal sources can include data on financial performance such as revenue, profits and losses, and external sources can include the findings of a study as published in a journal article or industry magazine.
Ideally, these sources of evidence are reliable and credible. We should be using reliable and credible evidence to make business decisions in order for us to both offer real business value, and to help move us towards our organisational goals.
Now, while we may have a heap of evidence to help make a decision, there are a number of techniques that we can use to help us arrive at that decision. We have a heap of data, and now we just need to be able to digest it all. How we digest this evidence will depend on what outcome we’re seeking from the decision to be made.
Some of the easiest decisions we can make are those which are quantitative in nature. These decisions are usually clear cut, with a classic example being whether or not we should make a decision that increases or decreases our profits. A classic technique here is the cost-benefit analysis, of which is used when considering the financial implications of each alternative outcome. Naturally, the logical decision here is to go with the decision that will make the most economic sense for our organisation.
While quantitative decisions can be relatively easy, we may face more difficulty with decisions that are qualitative in nature. For example, if we’re making a decision that requires us to weigh up and compare two competing options involving a mix of quantitative and qualitative factors, one of the simplest places to start is with a pros and cons list. This is an incredibly cost-effective technique and it can be done in either an individual or a group setting.
If we’re wanting to step the classic pros and cons technique up a notch, we can use a force field analysis. This involves looking at what the forces are for either driving or blocking our movement towards a particular goal. At the end of both of these techniques, we should be able to recognise the pros, cons, driving or blocking forces to our situation and use this as evidence to then make an informed decision to act (or not act, in some cases) to overcome them.
When we’re faced with two competing decisions that require us to assess multiple outcomes, the pros, cons, and force field analysis may seem a little too simple. If we’re looking for something with a bit more complexity and sophistication, we can opt for a decision making tree. This technique provides a visual aid to consider different phases of a decision subject which may not only have several phases, but also several solutions which pose ambiguous outcomes. It’s similar to a ‘choose your own path’ story, but with a bit more business attached to it.
While the techniques we’ve commented on so far are focused on the decisions that management can make in a strategic and tactical sense, it’s also important to consider techniques that management can implement to influence decisions made by employees in an operational sense. One of the most effective ways to do this is with the Influence Diagrams technique. The focus of this technique is on reducing the risk of human error in decision making. It allows us to assess the skill and reliability of our workforce together with how their errors can lead to certain outcomes. Naturally, this can be beneficial to us when creating policies and procedures, of which can influence decision making behaviour, therefore minimising operational risk within our organisation.
There is an obvious logic attached to evidence based decision making, of which suggests that we should be cautious of some of the less evidence based decision making techniques. This is especially the case for intuitive and ‘gut instinct’ techniques that we may face (and use!) from time to time. What these two techniques typically indicate is a lack of planning and a lack of evidence. It is also a weak foundation to justify and rely on for a decision that could potentially make or break your business.
To avoid the obscurity of an intuitive or gut instinct approach, analytic hierarchy processes (AHP) can be useful in some situations. This technique is best for complex decisions, and has three key parts. Firstly, this includes addressing the goal or problem you’re trying to solve. Secondly, it considers all of the possible solutions to your goal/problem (also known as ‘alternatives’). Thirdly, it offers a criteria that is used to judge the merit of the alternatives. These three steps are then transferred to a quantitative value which are weighed against the criteria of the process. This can be a costly and time consuming technique, however it has its benefits for minimising the risks associated with intuitive and gut based decision making.
While these less evidence based techniques have their flaws, they do also have their place. This is especially the case when we don’t have to perfect the outcome the first time around. Techniques which accommodate for this are typically called heuristic methods, and they essentially take the path of least resistance to arrive at a decision. They rely on continual improvement through trial and error, and while they are messier and less structured than some of the other techniques we’ve discussed here, they do have the benefit of saving both time and resources while remaining flexible to change. This can be especially beneficial for situations where you’re working with a new product or service, and you’re looking to do some testing with your market; think of it as a lean and agile approach.
A somewhat similar approach to this can be found with the traditional scientific method technique. This technique takes a basic seven step approach: (1) question formulation; (2) research; (3) hypothesis formulation; (4) experimentation; (5) observations from the experiment; (6) results of the experiment; and (7) conclusion. The conclusions from this approach can allow us to either accept or reject a hypothesis. One of the key benefits of this technique is that we can alter the variables to arrive at outcomes that are in our organisation’s favour, all of which have the benefit of aiding our decision making. Quite often you’ll find this approach in statistical modelling when it comes to strategic decision making.
At the end of the day, your choice of decision making technique will depend on what outcome you’re seeking in order to achieve your organisation’s goals, as well as the type of data that you’re working with. Whatever the situation may be, evidence-based management is one of the most logical and common-sense decision making approaches when you want to get the outcome ‘right’ the first time. Less evidence-based approaches accommodate for situations that don’t instantly require perfection, and much like their counterpart, have their benefits too. These techniques each have their time and place, and it’s up to your own decision making abilities to determine which of these is the most appropriate in your situation.
If you have any stories – good or bad – about the techniques and approaches you’ve used (or haven’t used!) in business decision making, I would love to hear them.
If you’re looking at improving your decision making techniques and abilities, or if you need some advice on a business decision, please contact me. I’m more than happy to have a conversation to help guide you.
