Business leaders make hundreds of decisions every day, many of which influence the success of the business as a whole. No pressure, right? That’s why one of the top skills sought after for managers is the ability to make efficient, informed, and effective business decisions.
The typical decision-making process involves defining the problem, gathering information, identifying alternatives, choosing among the alternatives, and reviewing/monitoring the results. There are many different techniques that are used by managers to help them choose among the alternatives and make a decision. In some instances, it may be a combination of a couple of different strategies that help them achieve the best results. What works for some organizations may not work for others, and what works for making one decision may not work for the next. We’ve compiled this list to help narrow things down and give you an idea of what some of the more popular tools and strategies for decision-making are.
Top Decision-Making Techniques & Tools
Marginal analysis weighs the benefits of an input or activity against the costs. This type of analysis helps business leaders determine whether and activity or input is providing the maximum return-on-investment (ROI). Marginal analysis is an effective tool for decision-making because it takes preferences, resources, and informational constraints into account, so managers can make more optimal decisions based on this information.
To conduct a marginal analysis, you need to change a variable, such as the quantity of an input you use, or the volume of output you produce. Once you’ve identified that variable, determine what the increase in total benefits would be if one more unit of the control variable were added. This is considered the marginal benefit of the added unit. Likewise, the marginal cost of the added good should also be calculated. The marginal cost is – you guessed it – the increase in total cost if one more unit of the control variable were added. If the marginal benefit outweighs the marginal cost, then there is a “net benefit” and the marginal unit of the variable should be added.
When you are planning to make a significant change in your business, SWOT diagrams can help you break down the situation into four distinct quadrants:
- Strengths: What does your company do better than its competitors? Think of both internal and external strengths that you possess.
- Weaknesses: Where can your company improve? Try to take a neutral approach and consider what factors may be hurting your business.
- Opportunities: Look at your strengths and think of how you can leverage them to create new openings for your business. Also consider how eliminating a specific weakness could open you up to a new opportunity.
- Threats: Determine what challenges stand in the way of achieving your goals. Identify the primary threats to your organization.
A SWOT Analysis can help you identify the forces that influence a strategy, action, or initiative. This information can then be used to guide you in the right direction and support your business decisions. To get the full picture, it’s essential to take multiple viewpoints into account. When you enlist the help of other team members and stakeholders, it is easier to spot trends, patterns, and connections between the quadrants. Taking a collaborative approach can also offer deeper insight into potential opportunities and threats you may not have been able to identify alone.
When you are dealing with multiple choices and variables, a decision matrix can bring clarity to the disarray. A decision matrix is similar to a pros/cons list, but it allows you to place a level of importance on each factor. That way, you can more accurately weigh the different options against each other.
How to Create a Decision Matrix:
- List your decision alternatives as rows
- List relevant factors as columns
- Establish a consistent scale to assess the value of each combination of alternatives and factors
- Determine how important each factor is towards making your final decision and assign weights accordingly
- Multiply your original ratings by the weighted rankings
- Add up the factors under each decision alternative
- The option that scores the highest wins
Decision Matrix Example:
In this example, a company is trying to make a decision about which vendor they should work with for an upcoming project. The factors they are using to evaluate each option are: capabilities, reputation, reliability, and price. They care more about the capabilities and price than the reputation and reliability of the vendor, so they weighted the importance of those factors accordingly. Based on the results from their decision matrix, they should be able to confidently decide on Vendor 2.
The Pareto Principle helps in identifying changes that will be the most effective for your business. The principle is named after economist Vilfredo Pareto, who found that an 80/20 distribution occurs regularly in the world. In other words, 20% of factors frequently contribute to 80% of the organization’s growth.
An example of this principle applying to business management would be 80% of sales coming from 20% of your customers. A business can leverage the Pareto Principle by identifying the characteristics of the top 20% of their customers and finding more customers like them. When you can identify what small changes will make the largest impact, you are able to prioritize the decisions that have the highest level of influence. This allows managers to dedicate their energy and resources on what will actually move the needle for their business.
The Next Step: Reviewing Your Decision & Making Adjustments
Once you’ve determined which techniques best aid in your decision-making, you can’t stop there. Being able to consistently make the right decisions is too important. In fact, decision effectiveness is 95% correlated with financial performance, so it is critical for managers to keep track of the decisions they make and how they turn out. Decision-making is an on-going process, and the best way to keep up is to use data dashboards.
Dashboards allow managers and executives to get information from multiple data sources in one system, so they can see how the business is performing against their goals. Plus, company data can be accessed in real-time, so managers can make quick decisions and adjustments based on what is working and what is not. Interested in seeing how a dashboard can help you make more informed, objective decisions?