Decision Criteria

What Is The Decision Criteria?

Decision Criteria in decision making refer to the set of factors or principles individuals or businesses consider while making an important decision. The prime purpose of this criterion is to consider a wide range of values and elements before finalizing a decision. 

Decision criteria is a crucial concept of corporate governance used in the decision-making process. It acts as a pillar for the future of the business. So, if a firm incorporates a decision criteria matrix, it can increase the sales of its goods and services. However, this criterion may be deliberately or unintentionally included.

• Decision criteria are a set of principles, standards, variables, or factors that influence the decisions made by individuals. It forms a base for major decisions in corporate governance. 
• The first origin of such criteria dates back to the 18th century. Later, statistician Frank Ramsey also contributed to this theory. 
• The process involves establishing objectives, preparing a roadmap, defining the criteria, developing a decision matrix, and analyzing decisions. 
• The three types of decision criteria include economic, technical, and personal criteria. 

Decision Criteria Explained

Decision criteria provides space for the involvement of various factors before making a decision. Also, it helps the managers and senior executives to make an ethical and logical decision. The decision criteria matrix is a vital component of the decision matrix. However, its origin dates back to the 18th century in the works of polymath Benjamin Franklin. Later, mathematician Frank Ramsey presented a set of rules for deciding an outcome. Thus, it paved the way for rational and logical decisions. However, poor decisions can also impact the overall business. 

The process of decision criteria in decision-making has various steps within it. For many firms, the procedure starts with the establishment of goals itself. A proper definition of objectives helps them to decide the criterion elements further. It serves as a base for future decisions. For instance, managers can list the strategic plans regarding future sales. Once defined, the next step is to create a roadmap for the same. Its main purpose is to list the daily tasks and priorities that must be focused on. It ensures that the resources and time are optimally utilized. However, the major concern lies in the factor selection.

As the resources are prioritized, the firm can collect the required information to identify decision criteria. Here, these criteria can be quantitative as well as qualitative. While some individuals make a decision based on their emotional experience, others may look at numbers. They can create a decision matrix with the respective variables and rank them likewise. Typically, a higher rank depicts its relevance to the decision matrix. For instance, the more relevant factors receive more priority compared to others. However, in the later stages, the user can change the criterion as per the situation. 

Types

Let us look at the three types of criteria that are prevalent in the decision criteria analysis:

#1 - Economic Criteria 

As the name suggests, economic criteria consider factors from an economic perspective. It means that managers may make a decision based on some economic factors. These factors have a major role in benefitting the organization. They include cost, expenses, opportunity cost, return on investment, capital, and resources. For instance, if the firm wants to change its current supplier, it may deploy the economic criteria to make the final decision. 

#2 - Technical Criteria

The technical criteria refer to the technical information regarding the product, which generally includes the characteristics and features of the product. This multi-criteria analysis only applies when the decision primarily depends on the technical criteria. For example, if the business wants to improve the product, it may consider convenience, comfort, reliability, risk, and efficiency.

#3 - Personal Criteria

Lastly, personal criteria are a type of qualitative decision-making. It considers personal experiences and touch. It also involves the personal preferences of an individual. Besides, firms may also include stress, effort, and style of a decision maker. 

In addition, social and environmental factors can help in identifying decision criteria. For instance, the manager may consider an optimal solution for decision-making that balances the climatic effect on the environment. 

Examples

Let us look at some examples of decision criteria to comprehend the concept better:

Example #1

Suppose Jessy is a sales manager in the Lopes Ltd firm, which operates in the retail segment and is mainly focused on the dairy sector. In the past few years, the business has seen a huge rise in its annual sales. However, they were still worried about the waste excreted from the dairy output. As a result, Jessy and management executives decided to discuss this matter. During this analysis, they utilized the decision criteria matrix. 

The team considered the major factors like environmental and climatic variables before making the final decision. After extensive research and observation, Jessy suggested a new upcycled product from whey. They decided to launch whey powder that would bring all benefits during athletic performances. As soon as this decision was made, Lopes Ltd saw a huge surge in their periodic sales. The customers found it more feasible and affordable compared to others. As a result, the average revenues rose by 15%.

Example #2

According to the recent news article, as of November 2023, the Institute for Clinical and Economic Review released the third annual score on prescription drugs. They analyzed 18 drugs, from cardiovascular medicines and cancer treatments to orphan therapeutics. It also focused on how the American insurers and pharmacy benefit managers fairly covered the drugs. There was a high degree of alignment via fair access criteria in this process. 

However, this report does miss out on some important aspects, like transparency of the insurer’s decision-making process. If it was included, the consumers would have made better yet informed choices on their drug purchases.

Importance

Decision criteria have a vital place in every decision made within the business. However, it does hold some importance in the business. Let us look at them:

• Leads to higher efficiency 

Such criteria are beneficial for businesses that aim for high efficiency. Managers can make effective decisions with this standard. It also improves the speed and quality of the decision-making process. Thus, decisions made after evaluating these factors do result in desired results. 

• Improves the revenue figures

This decision matrix can also help firms increase their sales figures. It forms the basis for the decisions that influence essential business deals. Likewise, if a business makes a poor decision, it can impact the overall revenue ratios. 

• Aligns the product with the customer’s choices

It also helps align the product characteristics with market preferences. In short, it gives a pre-market idea of the customer's taste and choices. For instance, a firm may conduct a market survey before launching a new product. 

• Creates a balance of goals

As businesses follow a decision criterion, they can also follow their objectives. The stakeholders and other team members also support the decision along with follow-up. Plus, it adds a level of fairness to the decision made.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is the Decision Criteria. Here, we explain the concept along with its examples, types, and importance. You may learn more about financing from the following articles –

• Multi-Criteria Decision Analysis
• Decision-Making Framework
• Project Selection Criteria