Key Elements to Decision Making

Effective decision making is paramount to the creation of value. And as things get more and more complicated, it's harder and harder to make effective decisions. So what are the key elements to effective decision making? According to Peter Drucker, the decision making process should make a distinction between generic conditions and unique situations. For the most part, many decisions are made as generic; i.e. you are facing a situation which is similar to another decision and you can therefore apply a set of rules and principles to the decision. A unique decision is not generic and thus you have no real guidelines to solve the problem. The biggest problem according to Drucker is that most managers try to force their generic type conditions into a unique situation. Peter Drucker also advocates the importance of feedback to make sure your decisions achieve their anticipated results.

Too often organizations are making decisions with an aggressive attitude that implies that we have the resources to implement our decisions and we can overcome any and all adversity. In reality this may not be the case. For example, projects like Enterprise Resource Planning will sometimes trap companies into a deeper and deeper hole. An endless flow of cash is poured into these technology projects with no real regard for honest feedback from users. If you're inside a hole, you need to stop digging! A much better approach is to take a trial and error approach or incremental decision-making .

Making decisions in steps or increments is often the preferred approach since all decisions are based on some assumptions. And these assumptions are easily invalidated by the introduction of new information. With incremental decision-making, you make adjustments along the way and correct your assumptions. In capital budgeting, we call this contingent claims analysis - building options into our projects so we can get out if we have to. Incremental decision-making lends itself very well to Financial Management. So the next time you make a financial management decision, go in steps with corrections along the way.

matt evans photo Written by: Matt H. Evans, CPA, CMA, CFM | Email: | Phone: 1-877-807-8756

Return to Listing of All Articles | Share | Related Articles > Pitfalls to Decision Making | Learning to Think