This article is a guide for decision-making tools and techniques. It offers a variety of types, diagrams, group decision-making processes and models. And all of them are applicable in many business areas as finance, trading, and project management.
The main sections are:
- Non-monetary decision-making tools and techniques
- Monetary decision-making techniques
- General diagram
- Group techniques
Ok, we need a little bit of theory. Decisions do not come in one second. There are some general steps.
Define problem or opportunity – usually we find a beneficial opportunity we’d like to achieve or a negative issue we’d like to avoid. They come from many sources in one company and we have many of them in our day-to-day job usually. General techniques here are to keep track of the major risk and best opportunities you have.
Gather information – so we have some information which we need to keep in mind. It can be internal corporate culture or external legal requirements.
Define alternative solutions – this process can be individual or group. More about the group decision-making technique here. Individual definition of alternatives usually needs analytical skills.
Verify selection criteria – first keep in touch with company’s vision and mission, follow the strategic plan /to the point you have information/, align with the road map, check KPIs, bear in mind for impacted stakeholders’ interests.
Evaluate and select alternative solution – this is the big one. This article is mainly about the process of evaluating alternative solutions and selecting it.
Act and follow up – obviously, you need to act as decided and to check what is the impact of the implemented decisions.
Non-monetary decision-making tools and techniques
There are some decision-making tools and techniques which can help you to select alternatives based on their qualities without taking into consideration pure monetary impact.
One of the simple methods especially if we need to fix issues and find beneficial opportunities fast. Pareto diagram decision-making technique is based on 80/20 rules (80% of issues or opportunities come from 20 % causes). So defining what cause most issues/benefits could be crucial.
Example – we are a software company and need to decide how to improve our products. For that reason, we make questionnaire survey with our customers. The results go into Pareto diagram.
What do you see on the Pareto chart?
Obviously, the performance is poor and we need to improve it.
Bugs are an issue also.
But the system is usable, not overpriced and with a good support team.
So Pareto chart supports taking the decision to improve performance.
One of the best decision-making tools is called cause-and-effect diagram, also known as fishbone diagram or Ishikawa diagram.
It is a great technique for investigating the exact cause of an issue.
The fishbone of the diagram can vary each time. But there are some typical types of bones depending on your business.
Big five M in industry or IT:
- Machine or technology
- Method or process
- Material – consumables or information
- Man Power – physical work or Mind Power (brain work)
Big 8 in marketing and sales – Product/Service, Price, Place, Promotion, People/personnel, Process, Physical Evidence, Publicity.
As you can see the Ishikawa diagram is great decision-making techniques in many, many business areas.
This is an interesting decision-making tool.
You can use control chart in order to decide if a process in within the predefined range.
And if the process is out of control the management should investigate and find a solution.
As you can see control chart has an upper limit, down limit and mean. On the diagram, we have an example of a process within a range.
One of the most popular decision-making techniques is creating a flowchart.
The flowcharts really shine when you have a process with steps and decisions in it.
These diagrams really help to define all the decisions which will be made in a process and their consequences.
The most important entities in flowcharts are the start, steps, decisions, exceptions, end.
Flowcharting helps in many areas – project management, business analysis, industry, trade, etc.
Another useful decision-making tool is called Scatter diagram (or Scatter chart).
This diagram displays relations between 2 variables. Which can really help the decision-making process.
On a diagram example, you see that a little change of Variable 1 leads to a massive change to Variable 2.
It can be a risk, it can be an opportunity but in any case, scatter diagram will be a useful technique for supporting decisions.
There are many different options for scatter diagrams – point relationship, trends, 3D scatter chart, and etc.
One of the basic decision-making tools and technique, especially if it comes for go/not go decisions for a new product.
The technique is simple, an inspector selects predefined subset of materials, products, customers and investigate if they matched the required quality/satisfaction.
There are many different types of statistical sampling but most important ones are probability vs non-probability sampling.
Probability statistical sampling – each one of the evaluated products/customers can be selected for a test.
Non-probability statistical sampling – not all of the – each one of the evaluated products/customers can be selected for a test. Some of them are excluded from sampling.
Sampling methods have some disadvantages because not all of the entities are checked but they can provide fast information for quality and products/customers readiness.Monetary decision-making techniques.
Monetary decision-making techniques
We all live a material world so making decisions based on their monetary impact is something normal. There are many monetary-based decision-making tools and techniques and here I will explain the most popular of them.
If you need to make a decision and you have some alternatives, the most simple and fast way for monetary selection is benefit/cost ratio.
You simply calculate the benefits and divide them into calculated costs. You have a coefficient for each alternative and you can select the highest coefficient.
There are some disadvantages with benefit/cost ratio methods. First – it is not so easy to calculate correct amount for benefits and costs. Second – you do not calculate indirect benefits as customer satisfaction.
Weighted Scoring Models
If you need to evaluate alternatives based on many criteria the best decision-making tools you can use is weighted scoring models.
You need to follow the next steps:
- Define alternatives
- Define criteria for evaluation
- Evaluate the weight of criteria in percentage
- Assign scores for each criterion
- Calculate the score
The weighted scoring model is an excellent technique when you need to select vendor’s proposal. And when you need to defend a decision to the high management. As a downside, it is time-consuming.
One simple but powerful technique. It is a simple calculation if you choose an alternative X and invest Y amount of money when you are going to have your money back.
The formula is Payback Period = Cost of Project / Annual Cash Inflows.
Net Present Value
One of the most important decision-making technique in case you have long lasting alternatives.
We all know that one dollar now is more than one dollar in the future. So Net Present value calculates what is the current value of the future income or expense.
So if you have alternatives that last more than one year Net Present Value comes handy.
I will try to explain the calculation as simple as possible with one example.
If we have 2 alternatives:
|Alternatives||Current investment||Income year 1||Income year 2||Income year 3|
|Alternative 1||50 000||20 000||20 000||20 000|
|Alternative 2||50 000||10 000||30 000||10 000|
Discount rate/inflation is 5% and we get payment in the beginning of each period.
So first we need to calculate the net present value of income year 2 and year 3.
The formula for calculating Net Present value for one period is:
Alternative 1, year 2 we have = 20 000 / (1+ 0.05) = 20000/1,05 =19 047 USD
Alternative 1, year 23we have = 20 000 / (1+ 0.05)*(1+ 0,05)= 20000/1,1025 =18 140 USD
Net Present value Alternative 1 = 20000 + 19 047 + 18 140 = 57 187 USD
Alternative 2, year 2 we have = 30 000 / (1+ 0.05) = 20000/1,05 =28 571 USD
Alternative 1, year 23we have = 10 000 / (1+ 0.05)*(1+ 0,05)= 20000/1,1025 =9 070 USD
Net Present value Alternative 1 = 20000 + 28 571 + 9 070= 57 821 USD
Obviosly, Alternative 2 is more profitable based on Net Present Value technique.
I will not go deeper into financial calculation since this is not the purpose of the article. You can find here additional information about other monetary coefficients as Internal Rate of Return and Discounted Cash Flow.
Opportunity Cost is the benefit of the second best alternative which is not selected. This is not a direct expense but it shows what you miss gaining as a benefit.
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One of the best examples of decision-making tools and techniques are decision diagrams.
Decision diagram displays:
- All possible alternatives
- Probability of success and failure
- Impact of the success and failure
- The amount of profit or loss based on calculation
As you can see on the diagram if you select Vendor 1 you will have average 18 000 USD profit and if you select Vendor 2 you will have average 17 600 USD profit.
All the above ideas are useful in case of standard “manual” decision-making processes. But there is software which can ease decision-making and makes it automatical.
There are methods embedded in the software which defines the path to the decisions. Most popular of them is multi-criteria decision making (MCDM). I will not go very deep into description here but the problem is broken into hierarchy sub-problems, alternatives are defines and compares, a numeric score is applied, and etc.
The most important software features are:
- Time analysis and optimization
- Pairwise comparison
- Sensitivity analysis
- Fuzzy logic calculations
- Risk aversion measurement
- Group evaluation
- Presentation tools
Here is the list with one of the best decision-making software and a short review of them:
The software defines alternatives to be considered by decision-makers, criteria by which the alternatives are compared and weight represented the importance of criteria.
- Prioritization solution for alternatives and people in a consistent.
- Value for money solution – compare alternatives’ “value for money” and resources allocation.
- Conjoint analysis – research what matters to people when making trade-offs.
- Group decision-making module.
Link to the official site – 1000Minds.
D-Sight is decision support software in the domains of projects and alternatives prioritization, a vendor selection and group decision-making.
The main solution of the software are:
- Project portfolio optimization tool – collect and centralize data for project & alternative requests, set priority and allocate resources.
- CDM – collaborative decision-making tool
- Strategic sourcing analysis tool
The company offers consultancy services to all kind of customers as IT companies, health-care companies, building enterprices, etc.
Official D-sight website.
Decision Lens is one of the best decision-making tools.
It offers prioritization of the technologies that provide better business decision-making, enhance Big Data analysis, increase IT security.
Decision Lens provides performs dynamic analysis of money flows, budget and resource allocation scenarios in order to reduce long-term costs.
This software helps to define most profitable alternatives, to defend your decisions and to have maximum benefits.
It is excellent tools when you need to choose innovation selection with fast scenario planning, trade-off analysis, and powerful visual analytics.
Official site of Decision Lens.
One of the best decision-making software which offers many useful features.
Expert Choice has comparison solution for prioritization of alternatives and resources allocation. The software compares alternatives, projects, vendors, products, marketing strategies, trade studies, and many others.
It offers risk management solutions for risk assessment and prioritization.
Expert Choice supports collaborative decision-making and aligning of decisions to the company’s strategic goals.
Link to the official Expert Choice site.
Group decision-making techniques
There are many group decision-making technique and here I will mention some of the most popular ones:
Focus Group – It is a useful qualitative decision-making technique. A group of preselected experts or stakeholders is brought together with a facilitator who explains the problems and alternatives, asks questions about the stakeholder’s expectations for the end solution. Just remember that the focus group should have experts from different areas.
Facilitated Workshops – similar techniques as Focus Groups. Facilitated Workshop brings together key stakeholders involved in an important decision and reaches agreements. This is especially critical for consensus building and when selecting alternative is required with inputs from multiple experts.
Group Creativity technique – The most common creativity techniques are Brainstorming, Nominal Group technique, Mind mapping, Delphi technique, Affinity diagrams. The purpose of all of them is to generate as many alternatives as possible and to prioritize them. Group Decision-making:
Group Decision-making – Once you have the alternatives you need to make a decision. There are some basic ways:
- Unanimity – Everyone must agree with the decision.
- Majority – at least 50% of the group members needs to support the decision
- Plurality – the most supported decision is selected even if it is supported than least of 50% of members.
- Dictatorship – One individual makes the decision.
During the an alternative discussion, you can expect some conflict to arise. Different stakeholders might have different interests.
According to PMI there are some common general ways to handle conflict situation:
- Avoiding – If some of the experts start arguing too often you can just separate them and not bring them in a meeting together.
- Smoothing – during a conflict you can concentrate on the area of agreement.
- Compromising – every one of the conflicting experts sacrifices something in order to obtain a decision.
- Forcing – a person with authority push one or more of the experts and takes the decision.
- Collaborating – researching alternatives from different viewpoints in order to have an agreement.
- Problem-solving – treating the conflict as a problem and solve it due to open dialog and give-and-take attitude.
Additional information for Project Management Tools.