Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

How to Make a Business Decision When the Stakes Are Truly High

Those who start and run their own businesses often get accustomed to making important decisions solo. Even if you're used to making gut-level calls on your own, however, you're likely to hit pause when a truly momentous choice arises.

Should you sell your business? Should your company take on an enormous amount of debt to exploit a once-in-a-lifetime market opportunity? The ramifications of these types of decisions tend to have a pretty long shelf life.

Ironically, many entrepreneurs are more inclined to seek help on matters of little significance than those which can potentially transform their businesses for better or for worse. And more often than we'd like to admit, our process for taking action when the stakes are truly high doesn't always differ significantly from the way we make important, but not crucial, choices.

When making transformative decisions, the entrepreneur should consider two actions as essential: using a decision-making framework and obtaining a documented, consensus opinion from a small, trusted group of advisors -- which can then be accepted or rejected. 

I'll briefly discuss the idea of a framework in this article, and address the concept of an advisory board in a companion piece.

Image source: Getty Images.

Frameworks, decision tools, and follow-through

Using a decision-making framework, that is, a process-driven approach, helps ensure that you're tackling your problem objectively and maximizing your chances for a positive outcome. A basic yet highly effective decision-making framework is presented by legendary management guru Peter Drucker in a 1967 article from the Harvard Business Review entitled "The Effective Decision." According to Drucker, an important decision requires that you expend energy in:

  1. Classifying the problem

  2. Defining the problem

  3. Specifying the answer to the problem

  4. Deciding what is "right," rather than what is acceptable, in order to meet the boundary conditions (i.e., minimum goals to be obtained)

  5. Building into the decision the action to carry it out

  6. Testing the validity and effectiveness of the decision against the actual course of events

The first two steps are native to any decision-making process. Here they may seem over-obvious; nonetheless, they should always get their due treatment on paper. Document the problem as if you were going to send it to a colleague to review. It may be helpful to put away what you write for at least a day and return to it, to see if you've framed the true issue as objectively and accurately as possible.

I've found from personal experience that the economic implications of the decision usually arise in step three. For example, those with a background in finance can use decision tools like discounted cash flow analysis to decide whether investing in a project will have a higher rate of return than what the current business generates.

Of course, you don't have to be an accountant or MBA to employ business decision tools. Entrepreneurs can apply back-of-the-napkin calculations to determine a project's payback period in months or years, for instance, or at least to ballpark the cash return of a significant proposed change to a business.

Drucker's fourth step -- determining what is right to meet minimum goals -- is informed by his insight that every important decision involves compromise. Successful business people learn very early that the art of compromise is a powerful skill which can be applied to nearly every facet of a business to expedite outcomes.

Yet the habit of compromise shouldn't inform the initial expedition to determine what is right. Making the best decision involves first envisioning the right course of action as if compromise wasn't required. As Drucker points out in his article, you'll inevitably have to compromise anyway. By the way, unsurprisingly, the personal and wholistic implications of the decision tend to crop up in this step.

The last two points in Drucker's process lean on your ability to execute, and to undertake a commitment to real-time analysis. "Building action" in step six means grappling with the details to make sure a decision gets executed -- and executed correctly. In the years since Drucker's article was published, we're more apt today to associate such details with the concept of accountability: Who should know about the decision? What are the specific actions which must be undertaken? and so forth.

I'll let Drucker's own words elucidate the final step in his decision-making framework:

Finally, information monitoring and reporting have to be built into the decision to provide continuous testing, against actual events, of the expectations that underlie the decisions. Decisions are made by people. People are fallible; at best, their works do not last long. Even the best decision has a high probability of being wrong. Even the most effective one eventually becomes obsolete.

There's much wisdom packed into these five sentences. The first time I read this, I resolved to follow my own "big decisions" with better monitoring and evaluation. Let's move on to discuss an important safeguard you should build into that all-important decision before it's finalized.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.