The Definitive Guide to Business Decision-Making

By Kate Eby | August 24, 2018

Making decisions — both large and small — is critical to the success of a business. Decisions come from the need to solve a problem or the need for a potential opportunity. Gathering the right amount of information and input from key stakeholders is essential for making informed decisions. Following one of the few accepted processes to collect intel and objectively weigh the pros and cons of the data can help steer you away from making unsound decisions. In this article, you’ll learn about popular decision-making processes and how to apply them to your own business.

What Is the Decision-Making Process?

The decision-making process involves identifying a goal, getting the relevant and necessary information, and weighing the alternatives in order to make a decision. The concept sounds simple, yet many people overlook some of the critical stages and risks that occur when making decisions. Wherever possible, it’s important to make the best decisions under the circumstances.

There are at least four strong benefits to making good decisions:

1. Good decisions last longer. You will rarely need to revisit a decision that was made using a well thought out process, and it can sometimes last the entire lifespan of an organization.

2. Good decisions weigh internal and external factors. A decision-maker should consider a company holistically. A sound decision won’t have one part of the business succeed at the expense of another. Both internal and external factors can affect the decision and the company's road map.

3. Good decisions eliminate conflicts of interest. With transparency and stakeholder buy-in during the decision-making process, questions or concerns after the fact become far less likely. The benefits of this process keep the organization on track and focused, and reduce churn.

4. Good decisions actually work better overall. Good decisions actually get the decision-maker, department, and company closer to their goal, and solve the initial problem.

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What Is the Decision Making Process Model?

Following a formal process with specific steps can help businesses make more informed decisions (see more benefits to using a formal process) and propel it forward. In fact, using a decision-making process tailored to the business world reaps enormous benefits that include the following:

  • Less Second-Guessing: If you follow a formal business decision-making process, you can demonstrate you've already considered various other options.
  • Translatable and Sharable Decisions and Progress: You can share the processes and steps upward to top management and the C suite, as well as downward into the ranks of those who'll be involved in executing the decision.
  • Guide or Roadmap: Capturing the decision-making process in writing can be useful to show stakeholders an explanation of the steps and strategy behind it, as well as provide backup details.

The late Harvard business professor and author J. Richard Hackman wrote many books about effective business leadership, teamwork, and decision-making, including Leading Teams: Setting the Stage for Great Performances. Empowering teams to make their own decisions and following the processes that work for them, Hackman explains in his book, results in cohesion and strength. But in making strong decisions, he adds, “Teams taking in too much data to make decisions can result in an overload trap, which can result in a team metaphorically drowning in data.” Therefore, it’s critical to be strategic at every step of the process.


How to Improve the Decision-Making Process

It’s critical to build evaluation into the process. Ensure that at least one of the steps includes evaluation and revisiting the process and its outcome, especially for future use. Additionally, get sign-off from all stakeholders in advance (even for the steps in the process) and keep them in the loop. Capture metrics along the way that show successes, failures, the comparative benefits of options you’ve considered, and research into what competitors have done, to help support your responses and keep the process moving smoothly.


Types of Traditional Processes in Business Decision-Making

Before we examine the various stepped plans in decision-making, we will explore a few specific types of decision-making. There are also several different actual processes that can be used in decision-making that involve a number of steps. The most popular and well-used processes have five, six, seven, or eight steps.

The number of steps will vary, of course, if you break down tasks that could be contained in a single step into additional steps. Regardless of the process you choose, evaluation is the last step, and smart companies will take the time to do this. Over time, organizations using this evaluation step can gain critical efficiencies in time and focus. It also helps ensure institutional learning for the overall health and strength of the company. All of the processes described in the following sections are in use today.

What Is the Five-Step Process in Decision-Making?

Many organizations follow the five-step process when making decisions. As you compare the following processes with the varying numbers of steps, you’ll see that some, like this one, combine activities, while others list them as separate steps. Here are the five steps in this process:

  1. Identify the end goal.
  2. Gather all your information needed to inform your decision.
  3. Evaluate all the risks and consequences.
  4. Make the decision and execute it.
  5. Evaluate the decision after the fact.

What Is the Six-Step Process in Decision-Making?

The six-step process focuses more on up-front research and information-gathering. This method front-loads the process with data that can make the rest of the process run smoothly. Here are the six steps in this process:

  1. Identify the end goal.
  2. Gather all the necessary information, and identify all the alternatives (without selecting one yet).
  3. Compare all these alternatives against the relevant criteria.
  4. Make the decision.
  5. Execute the decision.
  6. Evaluate the decision after the fact.

What Is the Ethical Decision-Making Process?

The ethical decision-making process is a process that stipulates that any and all decisions must include evaluating and selecting options that are consistent with ethical concerns. This means making the most ethical choices, regardless of the impact to the bottom line. Ethical decision-making also means eliminating any options that are not consistent with ethical values from the beginning.

According to the University of California San Diego, which cites the Josephson Institute of Ethics, ethical decision-making involves the 3 Cs:

  • Commitment: Never wavering from choosing or doing the ethical thing, whether it costs more or not.
  • Consciousness: Infusing your team and project members with enough awareness to own the ability to act ethically every day with moral certainty.
  • Competency: The ongoing process of evaluating information as you go and weighing options that allow you to continually make the right ethical decisions. As conditions in the world change, having a strong competency to evaluate these changes is mission-critical to staying the course in being ethical.

How to Make a Decision Using the Analytic Hierarchy Process

The analytic hierarchy process ensures that you are using specific criteria and rating those criteria, instead of simply comparing alternatives you've used in the past. The process involves creating an actual hierarchy of sub-issues, which you then evaluate and examine. Then, you measure these sub-issues against each other and assign each a relative value on the hierarchy. In short, alternative solutions are examined, and then weighed against each other.

While some businesses use the analytic hierarchy process, it is often used in academic or policy-related scenarios. In this method, a decision is made with the most important issues considered or weighted more heavily, and higher on the hierarchy, than others.

What Is the Rational Decision-Making Process?

As its name implies, rational decision-making relies strictly on data, measurable steps, and calculated values. This process focuses on minimizing costs and maximizing benefits to the organization. To use this process effectively, it’s critical to factor in personal biases of those involved and solve for them. The five-step process is usually used in rational decision-making.

As opposed to ethical decision making, there's no subjective judgement about criteria and steps to reach a decision in rational decision-making. However, it's possible the same decision could be reached using both processes.

What Is the Managerial Decision-Making Process?

The phrase managerial decision-making process is similar to and sometimes used interchangeably with the more general term business decision-making. But in fact, managers may have more decisions per day, including those affecting employees, beyond the typical business decisions that need to be made in an organization. Managerial decision-making often follows the five-step process.

According to the educational group Management Study Guide, there are three main types of managerial decisions:

  • Strategic: These kinds of decisions are typically made rarely. Not all levels of an organization are or need to be involved as the decision is being considered and decided. Examples of strategic managerial decisions include resource and investment, expansion or downsizing, mergers or acquisitions, investments, etc. These can take significant amounts of time and should not be rushed.
  • Operational: These decisions also take time to be fully explored and made. Higher level ones may involve only the C-suite and/or directors, and can include decisions affecting output, company-wide policies, and culture. Lower-level decisions of this type affect daily operations, so are often handled by upper and middle management.
  • Managerial: These are made by managers at every relevant level, from middle managers to the executive suite. They may cover issues like allocation of resources, the decisions to phase out or revise current products, the creation and introduction of new products, and the like. Every manager in an organization needs to be aligned and often involved in decisions at this level.

What Are the Best Practices in Any Business Decision-Making Process?

If you’re using a team to make a decision, it’s important to have the number of people involved. Hackman’s recommendation is to have about five people on a decision-making team. More than seven members, he writes, makes your decision-making group lose effectiveness.

Sometimes individuals need to make the decision, or perhaps just two C-level executives appoint themselves to make a decision. But Hackman’s study shows that overall, teams make 75 percent better decisions than individuals.

It’s also imperative to identify and fill the correct roles in your decision-making team. Otherwise you are guaranteeing frustration and churn. The Harvard Business Review suggests using the RAPID methodology (recommend, agree, perform, input, and decide). This option provides a high-level way to capture the flow of the step-by-step processes.

As a first step, send your team members out to do research and ask them to answer these questions:

  1. What are the most important goals for the decision?
  2. What are the top realistic choices?

Audit and combine the results with the team to collectively agree on the top choices or identify gaps. Be sure to communicate and build in time for feedback and questions all along your process. This ensures buy-in all through the process. Sometimes using a decision-making matrix can also help your team identify and weigh options.



Eisenhower Box Decision Matrix Template

Read “Make Up Your Mind: Free Downloadable Decision Matrix Templates” to earn more about using decision-making matrices.

5 Potential Pitfalls to Avoid when Using a Formal Decision-Making Process

Before embarking on a decision-making process, it’s useful to keep some potential pitfalls in mind. Following a process is important, but avoid following the process “out the window.” Here are five potential issues that could arise when using a formal decision-making process:

  1. Proceeding without Enough Information, or Relying on a Single Source: If you’re going to follow a formal process, you’ll need data. Document each step and get buy-in from your colleagues. Information is power, and gathering information from relevant but diverse sources is critical to being strategic.
  2. Gathering Too Much Information: Too much or irrelevant information can be overwhelming and confusing, and can lead decision makers astray from the issue that needs the decision, as well as how best to arrive at it.
  3. Placing Too Much Confidence in an Option that May Cause Bad Results: Try to identify a valid option or options as you hone in on a process and  decision. Gather enough data throughout the process so you can play out scenarios for each option.
  4. Solving for the Wrong Problem: Front-loading research can be critical if you don't understand what's causing the issue. For example, if your production output has been slipping, don't assume that you need more staff, or more factory hours, or any one thing, unless and until you can identify the true reason for the slowdown.
  5. Being Too Rigid with or Wedded to the Process: It’s possible to follow a decision-making process so strictly that the organic nature of a business, staff, and their needs are sidelined or ignored. Even when you are strategically and confidently following a business decision-making process, you and your team need to have the ability to pivot if needed.

Examples of Decision-Making Processes Successes

In a sense, a company’s entire history is a reflection of making decisions. Some of the top companies in the world have turned a failure into a success by focusing on the last crucial step in all decision-making processes: evaluating the decision after the fact.

One example of this is Coca-Cola in 1985. Business and leadership expert John Addison writes that the company decided to address the changing soda marketplace by launching “new Coke.” Unfortunately, the rebrand failed miserably within three months, which forced the company to reintroduce the original Coca-Cola. The big takeaway: Reversing direction isn’t a sign of failure; rather, it’s evidence of a leader’s commitment to keeping the company’s health a top priority. What’s more, it shows how important it is to revisit and evaluate decisions.

Companies often use data to try a pilot or program, and if it doesn’t work, they might revisit the decision and change course. In other cases, large companies are constantly assessing data to find actionable paths. These three companies found success by making decisions based on data and stakeholder reviews:

  • According to Harvard Business Review, Google created a people analytics department to help the company make HR decisions using data, including deciding if managers make a difference in their teams’ performance. The department used performance reviews and employee surveys to answer this question. The company learned that a laser focus on performance did not indicate the best or happiest teams; instead, managers with strong people skills had the best-performing groups — as well as employees who were happier and stayed longer at the company.
  • When Amazon was still a startup, its data gatherers noticed that customers who bought a certain book or CD or DVD also were more inclined to buy another product. Perhaps these related products were by the same author or artist, or maybe the movies starred the same actors or had similar subject matter. Or, maybe they were just hot titles the customer wanted. Editors at this time had been taking on the role of “trusted adviser,” making recommendations based on purchases through emails and other human-created collateral, but the company thought that an automated tool could augment what the human editors could suggest. Ultimately, Amazon decided to use that data to create its first, rudimentary personalization tool. By presenting customers with products that other customers also bought, the company realized a significant spike in sales.
  • Southwest Airlines famously studied its customer data to determine the perks and upgrades that would appeal to its regular flyers. Offering those perks and upgrades resulted in a boost in ridership and fierce loyalty among its customers.

These are examples of successes that relied on strong decision making, but of course, not all decisions succeed. Continually assessing and revisiting decisions is a sign of a mature company; otherwise, decisions could result in public failure. In the next section, we’ll look at some examples of failed decision making.

Examples of Decision-Making Process Failures

The failure of companies to adapt, change, or compete effectively probably can’t be tied to one bad decision or process failure. Still, in not rigorously gathering data, weighing options, and evaluating decisions, organizations can doom themselves. Here are some examples of companies that failed to use, or learn from, their decision-making processes:

  1. Blockbuster and Borders: Both of these once-successful brick-and-mortar companies   used data to reaffirm their own preconceptions instead of evaluating data objectively. Instead of adapting to the challenges and opportunities of the internet, their web properties and physical locations ultimately failed.
  2. Kodak: For decades this company was synonymous with photography in all its forms. But it didn’t fearlessly look at the changing landscape of digital photography. Even when it acquired Ofoto, it failed to maximize and monetize the opportunity. The company arrived late and quietly to the online photo gallery space with Kodak Gallery, which was subsequently acquired by Shutterfly.
  3. Newspapers: It’s hard to see a whole industry collapse because of bad decision-making and denial, but this is what began to happen in the late 1990s to newspapers. While some organizations, like the New York Times and Washington Post, have adapted to digital media, most city newspapers are struggling. Clinging to old business models never helped any business make strong, forward-looking decisions.

Team Building Exercises to Improve Decision-Making

If you’re ready to get your team energized to focus on making its decision, team-building exercises are a great place to start. These exercises help team members get to know and understand each other, which helps them get on the same page more quickly and ultimately improve their decisions. Here are some resources that can help you find the right team-building exercises for your decision-making group:

The Decision-Making Processes in Non-Business Fields

In non-business fields, decision-making can involve more or fewer factors, with different kinds of weight assigned to each step. Here is a quick overview of some other types of decision-making processes:

  • Consumer Decision-Making Processes: It’s important for marketers to recognize the steps consumers typically use to make a purchase decision. They include the following:
  1. Identify need. (I need a new winter coat.)
  2. Gather research and information. (What are the newest styles and warmest types of winter coats?)
  3. Evaluate the research. (So do I really need a new winter coat, or can I layer up with what I already have? If I need a new one, which one is best for my needs?)
  4. Buy the item.
  5. Evaluate the decision. (Was this winter coat a good decision? Am I happy I made it, and would I recommend this coat to other people, or buy it again for myself?)
  • Military and Governmental Decision-Making Processes: For those in the military and other types of government roles, decision-making can be a matter of life and death. Therefore, the protocol for making military operations decisions is detailed and strict. 
  • Education Decision-Making Processes: Many schools and school districts embrace shared decision-making, a process that involves members of the community, parents, students and former students, teachers, and anyone else invested in the success of a school or district. 

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