How to make business decisions

There are countless books on the subject of making better business decisions, because decision-making involves a complex interplay of factors.

Yet, the basics are relatively straightforward and logical.

In this article we’ll examine how to make better business decisions, examining the interplay between strategic, tactical, and operational decision-making.

We’ll also look at how bad decisions can occur and how to improve your chances of getting it right.

What is the difference between strategic, tactical, and operations decision-making?

Effective decision-making is crucial in every business but can be particularly hard within smaller businesses where resources and choices are more constrained.

A focus on survival can limit the ability to think strategically if management is forever fire-fighting.

It’s therefore useful to take a step back and examine the essentials.

There are three basic levels of decision-making within any business:

• Operational decisions: day-to-day decisions that ensure the business runs smoothly. Examples might include customer service actions, scheduling, and ordering new stock
• Tactical decisions: these are medium-term operations that support the strategy. For example, the launch of a marketing campaign
• Strategic decisions: these are long-term, impactful decisions that shape the future of a business.

It’s crucial to recognise the difference between these levels as there are specific actions that a business needs to perform to effectively aid decision-making in each of them.

While experience and intuition can be invaluable assets, those running a small business could also significantly improve outcomes by adopting simple, structured decision-making processes.

Tips for effective decision-making

Here are ways to aid decision making in each of these 3 separate levels:

Operational decision-making

• Standardise processes where possible, for instance by using checklists and Standard Operating Procedures
• delegate wisely and empower staff with decision rights
• use technology to speed up decision-making where possible, in areas such as inventory management and scheduling.

Tactical decision making

• Use data where it is available, such as KPIs to evaluate past decisions
• encourage agile thinking. For instance, by using pilot programmes before full rollouts
• create cross-functional teams to avoid information silos and encourage better decision-making.

Strategic decision making

• Actively anticipate market shifts and risks by using SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and scenario planning
• ensure strategic moves align with long-term goals
• bring in consultants, independent advisors, or board members when necessary.

Strategy does not equal planning

Strategic decision-making is arguably the most difficult to get right and Roger Martin, former Dean of the Rotman School of Management, who was a strategy advisor to Procter & Gamble, has some useful guidance on how to approach it saying, “The two most fundamental strategic choices are deciding where to play and how to win.”

In his book Playing to Win: How Strategy Really Works, co-authored with A.G. Lafley, former CEO of Procter & Gamble, Martin recommends asking five strategic questions: 

1. What is our winning aspiration? This defines the purpose of the business. It goes beyond mission to focus on what ‘winning’ looks like for the business.
2. Where will we play? This question clarifies the playing field—geographies, customer segments, channels, product types, and so on and lays out where in the market the business will compete.
3. How will we win? This is about determining the value proposition and competitive advantage that will allow the business to win on its chosen playing field.
4. What capabilities must be in place? Identifies the specific capabilities (skills, technologies, systems, and so on) needed to win.
5. What management systems are required? Defines the systems, structures, and measures needed to support the strategy and ensure its execution.

These questions are designed to be cascading and interconnected, helping leaders create a coherent and actionable strategy. 

While asking these questions will take business leaders out of their comfort zones and acting on them involves making hard choices, Martin states in this book: “It is only through making and acting on choices that you can win. Yes, clear, tough choices force your hand and confine you to a path. But they also free you to focus on what matters.”

Key decision-making models

There are myriad decision-making models that a business can use.  

Here are five popular ones, with a brief explanation of their strengths and weaknesses.

Intuitive Decision-Making

This relies on gut feeling, personal experience, and pattern recognition rather than formal analysis.

• Best for: people decisions, high-uncertainty environments, time-critical situations
• Strengths: fast and experience-driven
• Weaknesses: vulnerable to bias and inconsistency.

SWOT Analysis

A SWOT analysis evaluates strengths, weaknesses, opportunities, and threats (SWOT) to guide planning and prioritisation.

• Best for: strategy, product development, risk assessment
• Strength: simple and widely understood
• Weakness: subjective; not a decision by itself.

Cost-Benefit Analysis (CBA)

This compares the financial and strategic costs and benefits of different options.

• Best for: budget decisions, investment appraisals
• Strength: it has a clear focus on return on investment 
• Weakness: hard to quantify intangible or long-term effects.

OODA Loop (Observe–Orient–Decide–Act)

This is a rapid, iterative model for making and adjusting decisions in fast-changing environments. 

It was originally developed for military use but has been used in business.

• Best for: crisis response, agile business settings
• Strength: encourages flexibility and feedback loops
• Weakness: can lead to short-term thinking if not balanced by a strategy.

Cynefin Framework

The Cynefin framework is a decision-making tool that helps leaders understand the context of a situation and determine the appropriate approach to take. 

It categorises situations into five categories: Simple (now often called Clear), Complicated, Complex, Chaotic, and Aporia/Confusion. 

Each domain requires a different decision-making approach.

• Best for: navigating uncertainty or crisis
• Strength: adapts decision style to problem type
• Weakness: requires some training to use effectively.

In practice, many businesses adopt a hybrid model that blends elements of different models.

So, using the examples above, a business could:

• Use SWOT analysis for risk assessment
• Apply OODA for marketing tests
• Trust intuition for people decisions
• Apply Cynefin when uncertain about the nature of a problem.

Should you worry about which model to use?

The short answer is no, not really. 

The key for smaller businesses isn’t picking the perfect model, it’s about:

• adopting a structured process: to reduce bias and guesswork
• being consistent: so decisions can be reviewed and improved
• adapting to fit: the business’s size, speed, and capacity.

A simple model used consistently is better than a complex one never applied. 

After all, the ultimate aim is to make the right decision.

How do bad business decisions occur?

Bad business decisions can occur for a variety of reasons — some are avoidable with better processes or information, while others stem from unpredictable factors. 

Here's a breakdown of the most common causes:

Poor or incomplete information

One of the principle reasons for poor decision making is a lack of the right information.

Decisions can often be made without sufficient market research or financial analysis and using flawed or outdated information can mislead decision-makers.

Even with good data, drawing the wrong conclusions can lead to trouble.

Cognitive biases

Cognitive biases are, in essence, errors in thinking that can lead to inaccurate perceptions, and therefore wrong decisions. 

Some of these biases include:

• confirmation bias: favouring information that supports pre-existing beliefs
• overconfidence: overestimating knowledge or abilities, often seen in leadership
• anchoring: relying too heavily on the first piece of information encountered
• groupthink: pressure to conform in a team can silence dissenting opinions.

Lack of expertise or experience

Sometimes the right people simply aren’t in the room to make the decision. 

Leadership may not fully understand the industry, product, or market they’ve been asked to make a decision on for example. 

Similarly, new entrepreneurs might underestimate competition or operational complexity.

Emotional decision making

When making a decision it’s important to remove any emotion from the situation where possible.

Fear, of change or failure, can paralyse a decision maker whilst ego or pride can lead to advice being ignored, or a doubling down on bad plans.

Desperation during a period of financial stress can also encourage risky or irrational moves.

Poor strategic choices

Short-term gains being prioritised over long-term health of the business can often lead to poor decision-making.

Likewise, a failure to adapt to changing market environments, such as digital disruption can also mean trouble, as can a lack of clear goals or performance metrics.

Ineffective communication

Misalignment between departments or leadership teams can often result in faulty decisions being made.

This can include poor transmission of customer feedback or market signals and information being siloed in a department that could help prevent mistakes.

External Pressures

Investor demands, market volatility, regulatory shifts, or competitor actions may force hasty or reactive decisions.

How to excel at decision making

Even the best businesses occasionally make a bad decision. 

Still, it’s important to have a process in place that ensures it generally gets it right, while rectifying a poor decision before it inflicts critical damage on the business.

Here are three simple tips that may help:

• challenge constraints: contrarian thinking can deliver creative solutions
• embrace a pre-mortem: ask what could go wrong before starting a project
• check the basics: failure often occurs due to simple errors.

Decision-making on financial matters

Effective financial decision-making is critical for business success.

Here are a few suggestions that may improve how your business makes financial decisions:

• maintain accurate and timely financial records 
• implement financial Key Performance Indicators and track them 
• model best and worst-case scenarios and analyse how key variables could affect cash flow or profit  
• prioritise cash flow management and forecast short term cash needs to avoid nasty surprises
• create and regularly update business budgets
• before making large purchases or launching new projects, calculate the Return on Investment (ROI)
• get professional, independent advice for complex decisions like trying to decide between equity and debt financing or obtaining a business valuation
• align financial decisions with your strategic goals. For example, tie spending to growth objectives, productivity gains or risk mitigation.