Role of Decision Making in a Business

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If you run a business, you have to make decisions. Detail decisions, big-picture decisions, easy decisions, tough decisions. Even being indecisive is a decision, a refusal to take action. The importance of decision-making in business is that good, well-reasoned decisions steer your company toward success. Bad judgment can sink it.

The Decision-Making Context

Every business has its own decision-making process. The process is partly shaped by the environment:

  • Macrocontext. This is the big-picture stuff, such as what the laws or regulations require. If the law says a decision has to be made by the board of directors, that's the way it has to be.

  • Mesocontext. What's the organization's culture? Some companies want employee feedback for decisions that affect them. In other organizations, upper management hands down its decision from on high.

  • Microcontext. This is the immediate environment. The decision-making process changes depending on whether you're in a meeting with investors, employees or customers, for instance. 

The Decision-Making Process

The first step in making a decision is recognizing that a decision needs to be made. Companies often don't begin the decision-making process until a problem develops. Working proactively to spot potential problems ahead of time can enable you to head them off.

Once you identify the problem, you can slip in and out of different decision-making roles as you work on it.

  • Information gathering. What exactly is the issue and how bad is it? Employees, customers and experts may have their own vested interests to protect, so be careful of how they may filter the information they give you.

  • List possible solutions. Identify which options look best, which options are acceptable and which ones you don't want. This may be influenced by context: some solutions will be out of bounds because of regulations, others because they go against the mesocontext of your office culture.

  • Identify the potential effects of the problem, and of the solutions. For instance, removing a bullying supervisor may cost you his knowledge and skill, but it'll also boost employee morale.

  • Weigh the facts. Which of the options produces the best outcomes? Which is most likely to work?

  • Draw up a plan. Once you know the best option you have to find the right path to get there.
  • Launch!

Ways of Deciding

For a simple decision, like where the team goes to lunch, a quick show of hands may be all you need. Decisions with bigger potential impact require a better decision-making process. If you're not sure how to weigh the options, there are several systems you might consider.

  • Decision tree. List each option as one branch of the tree. Then have the options branch out into the possible outcomes. Then analyze them.

  • Decision matrix. The matrix shows the list of options and how they interact with the various factors in play. By scoring the different possibilities, you come out with the best choice.

  • Cost-benefit analysis. How much will the different alternatives cost to carry out? How much will choosing them boost your bottom line afterward?

  • Voting. Even if you don't want to pick the winning decision by majority vote, you can weed out some of the options by asking your team members for a vote. 

  • DACI decision-making model. This divides up decision-making roles between the Driver who gathers information; the Approver who makes the final call; the Contributors who weigh in but don't vote; and Informing everyone who needs to know the outcome.

Data vs. Instinct

Tools for the decision-making process such as DACI and cost-benefit analysis rely heavily on data, statistics and number-crunching. If the data or the experts say one thing and your gut instinct says another though, sometimes it's smart to trust your gut.

If your instinct tells you that the decision you're contemplating is a bad one, it could just be nerves or going outside your comfort zone. It could also be your unconscious has spotted an issue that you're otherwise ignoring, for example, that your consultant isn't as knowledgeable as they pretend.

In weighing instinct against analysis, it helps to get an outside opinion. If you have an adviser you can turn to who has no skin in the game, you can get an objective opinion whether your gut's on track or you're worrying about nothing.

Where Decisions Go Wrong

With any major judgment call, it's possible the decision-making process will take you to a bad place. There are multiple common ways the process can fail:

  • Rushing to make a decision too fast. Even if you're under pressure, it's more important to be right than quick.

  • Procrastinating on making the call. It's always tempting to wait until you've gathered more information or consulted more people. After a certain point, though, it's counter-productive.

  • Smothering yourself with so much information you can't see what's important.

  • Misidentifying the real issue.

  • Being vague about what you want to decide.

  • Ignoring your gut.

  • Too much process. It's okay to make small decisions quickly, without drawing up a matrix or making a statistical analysis.

  • Deciding based on the outcome you like best — the lowest risk, the best returns — without thinking about what outcome is most likely.

  • Your team members have doubts about the decision, but stay quiet rather than challenge the consensus. This can lead to situations in which the group decision is something none of the individuals actually support.

  • The team knows what you want, so they agree because they're afraid of your reaction otherwise.

Practical problems can also hamstring your decision-making process. Lack of time, limited information, personal distractions and disagreement over goals can all interfere with the functions of decision-making. Sometimes the people involved are just really bad at making decisions.

Improving Your Game

Given the importance of decision-making in business, it's a skill you need to develop. If you're not satisfied with how well you and your team fulfill your decision-making roles, take steps to improve.

  • Hold organized meetings. Bringing everyone together formally for a clear discussion with an agenda can go a long way toward improving the decision-making process. It's also a way to get everyone important, such as DACI's driver, approver and contributors, together at the same time.

  • Use logic. Even if you trust your gut, it's important to think through your decisions and what their impact will be. That will make it easier to persuade your stakeholders that your instinct is right.

  • Brainstorm, writing down every possible option you can think of. A lot of them won't be very good, but you may also turn up ideas you wouldn't normally think of.

After you've made the decision, evaluate your performance and your team's.

  • Did you handle the process as well as you could? 

  • Is the process what you want it to be or does it need tinkering? 

  • Does the process work the way you think? For example, you may imagine you let everyone offer opinions when in reality you dominate the discussion.

  • Did the decision-making process produce a satisfactory outcome? If not, figure out whether the problem was unreasonable optimism, lack of information, a rush to judgment or that you were in a bad position with no good outcome.

Whatever problems you spot, work to fix them the next time you have to make a decision.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com