My editorial process works much the same as my writing process does...lots of spreadsheets and Diet Coke.
Step 1: First I read through the manuscript from start to finish and write down my in-the-moment crits ("weakest opening ever", "I thought she was from Spain?" "tighten this up" and the like) in the margins.
Step 2: Then I break the manuscript down into chunks (usually by chapter) and determine if I need to keep it, edit it, or completely rewrite. I keep track of this info on a spreadsheet-cum-outline with pretty colors and wacky fonts. For some reason this keeps me focused and goal-oriented.
Step 3: For chapters that are especially problematic, I write a paragraph-by paragraph summary (1. Edna goes to the park. 2. Talks to Edmund about his haircut. etc.) and then see if there's not a way I can reconfigure/cut/rearrange from this quick-n-dirty outline level. If there isn't, it's an indication that I might need to ditch it altogether.
Step 4: Next, I go through chapter by chapter and do a deep edit/rewrite. Once I'm done, I print out the chapter itself and read out loud, then return to the computer draft and edit glaring errors and problems.
Step 5: Finally, I do what I call the "fun pass." This involves going through the book and assessing for fun (fun being anything that's compelling, moves quickly, says as much as possible in as few words as possible, contains nothing I'd want to skim over, has a strong voice). The fun pass is usually combined with a grammar/spell check.
Step 6: After this step, I pass the book off to my betas (and/or editor and agent). Once I get their feedback, I assess, rinse, and repeat.