A recent McKinsey Global Survey found that the way companies allocate resources and make investment decisions is critical to their ability to create shareholder value. The report identified five decision-making practices that are closely correlated to better performance:

1. Tying budgets to corporate strategy

Keeping corporate strategy in mind when setting budgets across the organisation avoids counter-productive budget cutbacks and reneging on previous budget decisions. McKinsey's report states: “For all the time managers spend developing their companies’ strategic plans, they don’t always succeed at reflecting those strategic priorities in subsequent budgeting decisions.” It found that taking an organisation-wide approach to setting budgets in line with overall strategy is the most effective way of achieving higher growth and profitability.

2. Making evidence-based decisions

Before making decisions, executives should thoroughly explore the range of possible outcomes and examine (and champion) data that might contradict the opinions or senior management. Discussing uncertainties is also important in decision-making. Scenario analysis is one of the most important techniques used by companies in the McKinsey study – although there are many other ways to check bias in your decision-making. The report states: “Respondents whose companies make the most use of evidence-based decision making are 36 percent likelier than their peers whose companies don’t use these techniques to report growing faster than competitors.”

3. Setting bottom-up performance goals

While the study found that larger companies tend to use more top-down target setting, McKinsey believes that bottom-up target setting is the approach that correlates more closely with strong performance. The company states: “Respondents whose companies do more bottom-up target setting are 26 percent likelier than those struggling with it to agree that their companies are growing faster than competitors.”

4. Formally ranking investments

Explicitly ranking potential investments is another marker of strong performance, according to McKinsey. The report said: “At companies that rank highest at setting priorities for high-value investments, respondents are 20 percent likelier than their peers who rank the lowest to report faster growth than competitors.”

5. Having similar financial characteristics among business units

McKinsey's report also found that companies are more likely to do well when the business units share characteristics of financial performance, such as similar revenue levels, profit margins, and returns on either capital or equity. It noted: “Companies tend to have a harder time managing businesses that are growing at different speeds or levels within the same portfolio.”