Decision Making and Business

Decision-Making Process in Business Environment

The activity of decision-making may be defined as mental processes leading to the choosing of one alternative out of many.

All decision-making processes generate an ultimate choice.

Decision-making output may be a chosen view or action.

Broadly, decision-making represents a process of choosing between numerous alternatives and making a commitment to adopting some particular option for the future (Masood).

The Nature of Decision-Making

Successful decision-making, realizing where one has made the wrong choice, and being quick to respond to one's errors, forms a major component of corporate efficiency.

According to some scholars, decision-making constitutes the most elementary and salient of all the responsibilities of a manager.

The activity of decision-making relates most closely to the activity of planning.

But it also forms part of leadership, organization, and control (Wicaksana).

Decision-Making Process

Decision-making entails six steps:

a. Problem Identification

• Need for explicitly outlining the issue

• Manager should thoroughly understand the issue

• Manager should carefully regard and assess the situation

b. Identification of Alternatives

a. The manager needs to recognize the fact that limited feasible options may be available, owing to ethical, legal, authority, and moral constraints, economic considerations, unofficial social standards, and technology availability.

c. Evaluation of Alternatives

• All individual options have to successfully pass through the following three steps before one can consider them as solutions to the problem:

• Feasibility -- Is the option legally feasible? Is it financially feasible? What are the informational, material and human resource constraints?

• Affordability -- What impact will choosing this option have on other organizational areas? What are the non-financial and financial costs linked to this option?

• Satisfactory -- Are the decision situation's conditions met by the alternative? [50% sales growth]

• 'Price tags' should be attached by the manager, on every option's consequences

• An option whose consequences overtax the organization's financial and other resources should not be chosen even if it is feasible as well as satisfactory (Wicaksana)

d. Alternative Selection

• The biggest challenge for a decision-maker is selecting the best option

• The objective must be optimization, as any decision will likely impact multiple departments and persons

• One may also be able to identify two or more acceptable options. It is not compulsory to choose only one option and discard all others (Wicaksana).

e. Implementation of the selected alternative

• Managers should take stakeholders' resistance to organizational change into account when executing the alternative.

• Some options are easy to implement, while others prove rather time-consuming or challenging.

• Operational plans prove valuable in the implementation of options.

• Moreover, managers should realize that even after undertaking the most accurate evaluation possible, of all potential options and their repercussions, unforeseen consequences may arise.

f. Follow-up and outcome evaluation

• Managers should assess their choice's effectiveness -- Did the selected course of action serve its real purpose?

• In case the implemented option seems to be unsuccessful, the manager may:

0. Adopt another of the earlier-determined options or

0. Commence the decision-making process from scratch after realizing he/she failed to accurately define the situation or

0. Agree that the option hasn't had sufficient time to prove its effectiveness (or lack thereof), or ought to be implemented differently (Wicaksana).

IV. Types of Decisions

1. Programmed decision

• These are decisions that repeat with a particular frequency, or are fairly structured, or both.

• Several decisions pertaining to fundamental operating processes and structures, and standard business transactions, fall under the category of programmed decisions.

• Numerous businesses such as Starbucks apply programmed decision-making for the replenishing supplies such as coffee beans, napkins, and cups.

1. Non-programmed decision

• These are unstructured decisions that occur far less frequently compared to programmed decisions.

• A majority of top management decisions revolving around organizational plans and approaches fall under this category (Wicaksana).

• Some examples of non-programmed corporate decisions are decisions pertaining to acquisitions, takeovers, and mergers, new products, new facilities, legal issues, and labor contracts.

• Managers who have to make such decisions should regard all decisions as unique, and invest considerable quantities of energy, time and financial and human resources into examining the issue from all perspectives

• Experience and intuition form the key factors in such decision-making (Wicaksana).

V. Decision-Making Conditions

a. Decision-Making Under Certainty

• Every fact needed by decision-making entities is wholly available

• There is a feel of certainty, with the decision-maker being reasonably aware and sure of the options and conditions linked to individual options.

• However, not much business decision-making is done under such circumstances. The unstable and multifaceted business environment seldom allows for this kind of decision-making (Wicaksana).

b. Decision-Making Under Risk

• Explicit goals are outlined

• Availability of sound information

• Future outcomes linked to individual options are dependent on chance (Chapter 9. Managerial Decision-making)

• There is an element of risk when decision-making is conducted in a situation wherein individual options' availability, costs and possible payoffs are related to probability estimate

• The basis of these decisions is past experiences, personal judgment, relevant facts, and others' advice

• Decisions are 'calculated' based on which option will most probably working well (Wicaksana)

c. Decision-Making Under Uncertainty

• The manager has well-defined goals he/she intends to accomplish

• Incomplete information is available on future events and options

• The manager might need to approach options innovatively (Chapter 9. Managerial Decision-making)

• There is a certain degree of uncertainty, with decision-makers unaware of every option available, associated risks, or possible associated consequences of individual options

• Much of modern organization's key decisions are made under such conditions

• For sound decision-making under such circumstances, a manager needs to secure maximum possible relevant facts and take a rational and logical approach to the situation

• Judgment, experience, and intuition always have a key part to play in decision-making under such circumstances (Wicaksana).

d. Decision-making under Ambiguity

0. The most challenging decision condition thus far

0. Targets to accomplish or the issue to be resolved is vague

0. It is not easy to determine options available

0. No information exists with regard to outcomes (Chapter 9. Managerial Decision-making)

VI. Decision-making Styles

a. Directive style

1. Individuals who desire explicit, straightforward resolutions to issues

1. Swift decision-making

1. May take no more than two options into consideration

1. Effectual and reasonable

1. Prefer procedures or rules (Chapter 9. Managerial Decision-making)

b. Analytical style

1. Multifarious solutions founded on maximum possible gathered data

1. Careful consideration of options

1. Decisions based on unbiased, logical facts from sources such as management control systems

1. Seek best decisions on the basis of available information (Chapter 9. Managerial Decision-making)

c. Conceptual style

1. Takes an extensive quantity of information into account

1. More of a socially oriented approach, than an analytical one

1. Prefers discussing the issue and potential solutions with others

1. Takes numerous broad options into account

1. Relies on facts from systems and individuals

1. Creative solution to issues (Chapter 9. Managerial Decision-making)

d. Behavioral style

1. Deeply concerned for fellow human beings

1. Prefers engaging in direct, one-to-one communication

1. Recognize their feelings with regard to the issue and a particular decision's impacts on them

1. Interested in others' personal development

1. May engage in decision-making to aid others in accomplishing their objectives (Chapter 9. Managerial Decision-making)

VII. Decision-Making Models