DECISION MAKING
When trying to
make a good decision, a person must weigh the positives and negatives of each
option, and consider all the alternatives. For effective decision making, a person must be able to forecast the outcome of each option as well,
and based on all these items,
determine which option is the best for that particular situation.
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TYPES OF DECISIONS
A business continually makes
decisions at all levels. Think of a retailer such as Next. To keep the brand’s
high profile position, its managers have to make many decisions. Each major
strategic decision leads to tactical decisions, which break down into
operational decisions.
Decisions are broadly taken at three
levels:
·
Strategic
decisions are big choices of identity and
direction. Who are we? Where are we heading? These decisions are often complex
and multi-dimensional. They may involve large sums of money, have a long-term
impact and are usually taken by senior management.
·
Tactical
decisions are about how to manage performance
to achieve the strategy. What resources are needed? What is the timescale?
These decisions are distinctive but within clearer boundaries. They may involve
significant resources, have medium-term implications and may be taken by senior
or middle managers.
·
Operational
decisions are more routine and follow known
rules. How many? To what specification? These decisions involve more limited
resources, have a shorter-term application and can be taken by middle or first
line managers.
Decisions in action
Imagine Next is planning to expand
its product range. Its decisions would involve all three levels. All decisions
depend on information. The key is to get the right information to the right
people at the right time. For example, management accountants at Shell, the
global oil and gas company, have been improving the way the company deals with
the strategic and operational data about its global energy projects to improve
strategic planning.
The company brought together data from
1200 projects and opportunities across 40 countries into a single system.
Bringing the information together was a complex task due to the size of the
company’s operations. However, the system has helped to define strategies and
provide greater insight and detail to the Executive Committee and Board. This
has given greater clarity on the business’ current and potential performance
and highlighted where the company should allocate resources. To date, the
system has helped Shell to increase net present value by over 15%
The Five-Step
Decision Making Process
You can
adapt the familiar five-step decision making process (outlined below) to decide
which program or service to assess.
Step
1 Identifying/clarifying the decision to be made. If the decision has not yet been isolated, it should
be identified as a first step. Sometimes the decision to be made will have been
presented to the decision maker. In those situations, Step 1 calls for the
clarification of what the decision actually entails.
Step
2 Identifying possible decision options. The next step requires the decision maker to spell out, as
clearly as possible, just what the decision alternatives really are. For
instance, if one were attempting to buy a bicycle, do the decision options only
consist of the different types of bicycles, or is another option to refrain
from buying a bicycle altogether?
Step
3 Gathering/processing information. Next, the decision maker collects or processes information
that can help guide the decision. If such information is already at hand, then
it simply needs to be processed; that is, studied and understood by the
decision maker. If there is no relevant information available, or if there is
insufficient information, then such information must be collected so it can be
processed. The more significant the decision, the more rigorous the
information-gathering process.
Step
4 Making/implementing the decision. After the information has been considered according to its
relevance and significance, a decision based on that information should be made
and, thereafter, implemented.
Step
5 Evaluating the decision. In
recognition of the fact that not all of one's decisions are likely to be
defensible, the final step in the five-step decision making process is to
determine whether the decision was appropriate. Ordinarily, this will be done
by ascertaining the decision's consequences.
Decision-making
is a crucial part of good business. The question then is ‘how is a good
decision made?
One part of the
answer is good information, and experience in interpreting information.
Consultation ie seeking the views and expertise of other people also helps, as
does the ability to admit one was wrong and change one’s mind. There are also
aids to decision-making, various techniques which help to make information
clearer and better analysed, and to add numerical and objective precision to
decision-making (where appropriate) to reduce the amount of subjectivity.
Managers can be
trained to make better decisions. They also need a supportive environment where
they won’t be unfairly criticised for making wrong decisions (as we all do
sometimes) and will receive proper support from their colleague and superiors.
A climate of criticism and fear stifles risk-taking and creativity; managers
will respond by ‘playing it safe’ to minimise the risk of criticism which
diminishes the business’ effectiveness in responding to market changes. It may
also mean managers spend too much time trying to pass the blame around rather
than getting on with running the business.
Decision-making
increasingly happens at all levels of a business. The Board of Directors may
make the grand strategic decisions about investment and direction of future
growth, and managers may make the more tactical decisions about how their own
department may contribute most effectively to the overall business objectives.
But quite ordinary employees are increasingly expected to make decisions about
the conduct of their own tasks, responses to customers and improvements to
business practice. This needs careful recruitment and selection, good training,
and enlightened management.
Types
of Business Decisions
1.
Programmed Decisions These
are standard decisions which always follow the same routine. As such, they can
be written down into a series of fixed steps which anyone can follow. They
could even be written as computer program
2.
Non-Programmed Decisions. These
are non-standard and non-routine. Each decision is not quite the same as any
previous decision.
3.
Strategic Decisions. These
affect the long-term direction of the business eg whether to take over Company
A or Company B
4.
Tactical Decisions. These
are medium-term decisions about how to implement strategy eg what kind of
marketing to have, or how many extra staff to recruit
5.
Operational Decisions. These
are short-term decisions (also called administrative decisions) about how to
implement the tactics eg which firm to use to make deliveries.
Figure
1: Levels of Decision-Making
Figure
2: The Decision-Making Process
The model in
Figure 2 above is a normative
model, because it illustrates how a good decision ought to be
made. Business Studies also uses positive models which simply aim to
illustrate how decisions are, in fact, made in businesses without commenting on
whether they are good or bad.
Linear
programming models help
to explore maximising or minimising constraints eg one can program a computer
with information that establishes parameters for minimising costs subject to
certain situations and information about those situations.
Spread-sheets
are widely used for ‘what if’ simulations. A very large spread-sheet can be used
to hold all the known information about, say, pricing and the effects of
pricing on profits. The different pricing assumptions can be fed into the
spread-sheet ‘modelling’ different pricing strategies. This is a lot quicker
and an awful lot cheaper than actually changing prices to see what happens. On
the other hand, a spread-sheet is only as good as the information put into it
and no spread-sheet can fully reflect the real world. But it is very useful
management information to know what might happen to profits ‘what if’ a
skimming strategy, or a penetration strategy were used for pricing.
The computer
does not take decisions; managers do. But it helps managers to have quick and
reliable quantitative information about the business as it is and the business
as it might be in different sets of circumstances. There is, however, a lot of
research into ‘expert systems’ which aim to replicate the way real people
(doctors, lawyers, managers, and the like) take decisions. The aim is that
computers can, one day, take decisions, or at least programmed decisions (see
above). For example, an expedition could carry an expert medical system on a
lap-top to deal with any medical emergencies even though the nearest doctor is
thousands of miles away. Already it is possible, in the US, to put a credit
card into a ‘hole-in-the-wall’ machine and get basic legal advice about basic
and standard legal problems.
Decision Making Strategies in
Business
You make decisions every day, most
likely using one of these strategies. In a business, the board of directors or
president usually makes strategic decisions regarding the future of the
company, but decision-making takes place at every level. Decisions involve a
high degree of uncertainty and risk, but a good strategy can help reduce that
risk. “Decision making can be affected not only by rational judgment, but also
by nonrational factors, such as the personality of the decision maker, peer
pressure, the organizational situation and others,” reports Reference for
Business website.
TYPES
The five main types of business
decisions are programmed, non-programmed, strategic, tactical and operational.
Routine decisions, called programmed decisions, have a specific method that anyone
can follow. Non-programmed decisions are those that are different from any
previous or standard decision. Decisions that affect the long-term strategy and
goals of the business are called strategic decisions. Tactical decisions focus
on medium-term goals that push towards long-term strategic goals. Operational,
or administrative, decisions are shorter-term decisions that build toward the
long-term goals.
Intuitive Analysis
Reference for Business reports that
“Entrepreneurs are famous for making decisions, which means they make quick
decisions based on a gut feeling or intuition.” Many times, you make decisions
without all the data needed; you have to trust your instincts. Intuitive
decision-making can be dangerous, so be careful and try to get as much information
as possible.
Systematic Analysis
You do not have to sacrifice
analysis and information to make decisions quickly. Systematic analysis
involves collecting as much information as possible and analyzing it in an
ordered and logical way to find the best option. “Managers can prepare
themselves for making quick decisions by practicing pre-decision making,”
reports Reference for Business website. Your analysis and intuition may not
match. If the analysis seems wrong, keep searching until all the results make
sense.
Principle
Based Decision Making
Principled decision-making, while
not widely used, relies on personal beliefs and principles such as ethics.
Unlike ethical or moral decision-making, the principles used may be unethical
or may lead to unethical outcomes. The two-step process begins with selection
and communication of principles to use and ends with the application of those
principles to the situation at hand. Company mission statements and goals often
provide principles that guide decision-making. According to Reference for
Business, “Such principles, when used in decision making, can help the
organization better cope with changes over time: shifts in leaders, fluctuating
leadership styles and changing market conditions.”
Strategic
Decision Making
Strategic decisions are major
decisions that concern the direction of the company as a whole. These include
new products, mergers, strategic alliances; usually handled by the CEO,
president or board of directors for the company. According to Reference for
Business, “Companies are being forced to compete on the edge ... top management
is engaged in creating a continuing flow of temporary and shifting competitive
advantages relative to other competitors and the market being served.”
There are different
types of decisions made in a company. They differ based on the risks involved
and the level where the decision is made. The bigger the risks involved, the
higher the level where it’s made. Here are the various types and the things
that differentiate them from each other.
Strategic
decisions
They’re the ones that have a huge impact and lots of
risks for a business. A good example is when you’re thinking about whether or
not you’ll apply for a loan in order to set up a new branch. Because of their huge
significance, strategic decisions are usually made at the top level of a
company. The details are known only to a few people. Sometimes consultations
with workers are made to ensure that there will be no adverse reactions after
the decision is implemented.
Tactical
decisions
These support the strategic decisions that were made
at the top level, and have moderate consequences. They’re made by the mid-level
managers of a company. An example of this is the marketing strategy that you
use to promote the new store that you just set up. After a decision was made by
the board of directors, the next phase will be to take the other steps needed
to implement it. Here, things such as the amount of money that you’ll need to
allot for different things such as posters or online ads is decided upon. The
number of employees that you hire for the new store is considered a tactical
decision too.
Operational
decisions
Also called administrative decisions, they have
short term consequences for a business. They’re usually made by low-level
supervisors or even by ordinary employees. After you make a decision about what
marketing strategy to use, the next thing you need to choose are the steps to
do to implement it. The same ad campaign can be done in different ways, but
still produce the same effect that the managers expect. The employees can make
the choice of who will post the ads or give flyers to people to promote your
new store.
These three types of choices are made at different
levels based on their effects. Like all kinds of decisions, they’re made based
on careful analysis of a situation and the risks involved. You don’t make them
based on what’s written on your horoscope for the day. You base your decisions
on facts and information, and the risks that they have for your company.
MANAGERIAL
DECISION-MAKING STEPS TO HELP YOU EXECUTE BETTER AND FASTER
Excellent managerial decision-making accounts for
the difference between businesses that grow fast and businesses that don't.
Managers and entrepreneurs who rise to the top and take their companies with
them have usually developed habits and systems for making difficult decisions.
Here is a system of creative decision-making narrowed down to 7 core steps:
1.
Identify the core problem/core opportunity
The apparent complexity of business problems usually
obscures the fact that most visible "problems" are merely symptoms or
effects cascading from one root problem (the cause). This is a general
phenomenon of systems. Complex chains of cause and effect in a system mean that
the greatest changes can be brought about when adjustments are made at the
root.
On the other hand,
identifying the core opportunity in a marketplace can be just as complex as
identifying a core problem. Often, it requires the ability to mine the customer
landscape to identify their "core problem", before you
reverse-engineer a product or solution for it and offer that solution to the
customer.
2.
Brainstorm your options
In this phase, your job becomes either to know or to
discover the full breadth of alternatives available to you. 2 factors that
differentiate successful business leaders start to show up in this phase.
A manager with a great
deal of experience is able to draw up a wider set of potential directions to
choose from. Separately, a manger who is disciplined at execution is able to
research unknown or new options at a much faster pace, and replicate the
advantages of much deeper experience.
3.
Analyze Options
Management decision-making in today's world is an
established science in its own right. There are literally hundreds of strategic
thinking tools applied by managers to analyze options and make decisions.
However, many of these tools are useless if the core assumptions under-girding
the analysis are wrong or misguided. You must make sure that your managerial
decision-making process includes ways to test assumptions as well as a system
for cycling back if assumptions turn out to be wrong.
4.
Make a Decision
The point of analysis is for managerial
decision-making to be a faster and better process that leads to the attainment
of business goals. However, even with excellent analytical tools, a leader's
personal decision-making style can affect the speed at which decisions are
made, and even the quality of the final decision. Decisive managers accept that
bad outcomes can result from good decision-making procedures and take solace in
the quality of their preparation and their process.
5.
Take Action
Depending on the size of the organization you lead,
the gap between resolution and taking action can be quite wide and time
consuming. A bias for action is the single biggest determinant to making better
and better decisions over the long run. There are just too many details and too
much complexity in the business environment for a manager to attempt to be
completely prescient.
To paraphrase business adviser Dan Kennedy, the best
chance you have is to figure out the things that don't work (and won't work) as
quickly and as cheaply as possible. That requires a culture of rapid decision
and action.
6.
Review Results
As a consultant, one of the most pervasive phenomena
I have encountered in business is that of the business leader who hates to go
back; who hates to review past work. Whether due to personality or habit, many
entrepreneurs find the monitoring and testing of mundane business details to be
distasteful at best.
Constant monitoring is one of the commonalities
found in fast growing businesses. Recently, I spoke with a software
manufacturer who found increased sales by monitoring buyer behavior. He and his
team observed that a few web visitors who were abandoning the web site during
the shopping cart process were coming back 2 or 3 days later to make a
purchase. When they provided web shoppers with a "Save shopping cart"
feature, purchases increased significantly.
7.
Implement changes
The point of monitoring and tracking decisions and
their results is to make improvements. Not just improvements in products and
processes, but improvements in overall decision making. Making a habit of
systematic change, will help you build a more nimble and profitable
organization.
Decision Making Styles
Directive, analytical, conceptual, and behavioral
decision-making styles may be used depending upon the manager and nature of the
situation.
·
The decision-making style used will vary by the nature of the
situation and the decision that needs to be made.
·
The directive style,
sometimes referred to "autocratic" style, reflects an individual
style where the decision maker relies on their own information, knowledge,
experience and judgment.
·
The other three styles of decision making entail
varying degrees of involvement of others in gathering information and
perspectives, and may include a direct role in making the decision.
There are four essential styles
of decision making:
·
Directive: The group leader
solves the problem, using the information he possesses. He/she does not consult
with anyone else nor seek information in any form. This style assumes that the
leader has sufficient information to examine all the relevant options and make
an effective decision, but that is rarely the case.
·
Analytical: When the leader does not possess sufficient
information to make an effective decision, they will need to obtain information
or skill from others. They may not tell them what the problem is; normally,
they simply asks for information. The leader then evaluates the information and
makes the decision.
·
Conceptual: The leader
explains the situation to the group or individuals whom he provides with
relevant information, and together they generate and evaluate many possible
solutions. This style tends to be have a long-term perspective and, as a
result, will be more creative and expansive in their approach entailing a
higher level of risk for the long-term benefit of the organization.
·
Behavioral: The leader
explains the situation to the group or individuals and provides the relevant
information. Together they attempt to reconcile differences and negotiate a
solution that is acceptable to all parties. The leader may consult with others
before the meeting in order to prepare his case and generate alternative
decisions that are acceptable to them.
While decision-making styles can depend on the situation, according
to behavioralist Isabel Briggs Myers, a person's decision-making process
depends to a significant degree on their cognitive style. For example, a
manager who scored near the thinking,extroversion, sensing, and judgment ends of the
dimensions would tend to have a logical, analytical, objective, critical, and empirical decision-making
style.
The job of a manager
is, above all, to make decisions. At any moment in any day, most executives are
engaged in some aspect of decision making: exchanging information, reviewing
data, coming up with ideas, evaluating alternatives, implementing directives,
following up. But while managers at all levels must play the role of decision
maker, the way a successful manager approaches the decision-making process
changes as he or she moves up in the organization. At lower levels, the job is
to get widgets out the door (or, in the case of services, to solve glitches on
the spot). Action is at a premium. At higher levels, the job involves making
decisions about which widgets or services to offer and how to develop them. To
climb the corporate ladder and be effective in new roles, managers need to learn
new skills and behaviors—to change the way they use information and the way
they create and evaluate options. In fact, we’ve seen in our executive coaching
that making decisions like a full-fledged senior executive too soon can hurl an
ambitious middle manager right off the fast track. It’s just as destructive to
act like a first-line supervisor after being bumped up to senior management.
Our in-depth research into the reasons
behind executive success and failure confirms just how consistently decision-making
styles change over the course of successful executives’ careers. We scoured a
database of more than 120,000 people to identify the decision-making qualities
and behaviors associated with executive success and found that good managers’
decision styles evolve in a predictable pattern. Fortunately, struggling
managers can often get back on track just by recognizing that they’ve failed to
let go of old habits or that they’ve jumped too quickly into executive mode.
Defining Decision Styles
Before we look at the patterns, it’s
helpful to define the decision styles. We have observed that decision styles
differ in two fundamental ways: how information is used and how options are
created. When it comes to information use, some people want to mull over reams of
data before they make any decision. In the management literature, such people
are called “maximizers.” Maximizers can’t rest until they are certain they’ve
found the very best answer. The result is a well-informed decision, but it may
come at a cost in terms of time and efficiency. Other managers just want the
key facts—they’re apt to leap to hypotheses and then test them as they go.
Here, the literature borrows a term from behavioral economist Herbert Simon:
“Satisficers” are ready to act as soon as they have enough information to
satisfy their requirements.
As for creating options, “single
focus” decision makers strongly believe in taking one course of action, while
their “multifocused” counterparts generate lists of possible options and may
pursue multiple courses. Single-focus people put their energy into making
things come out as they believe they should, multifocus people into adapting to
circumstances.
Using the two dimensions of
information use and focus, we’ve created a matrix that identifies four styles
of decision making: decisive (little information, one course of action);
flexible (little information, many options); hierarchic (lots of data, one
course of action); and integrative (lots of data, many options). (See the
exhibit “Four Styles of Decision Making.”)
Decisive.People using the decisive style value
action, speed, efficiency, and consistency. Once a plan is in place, they stick
to it and move on to the next decision. In dealing with other people, they
value honesty, clarity, loyalty, and, especially, brevity. Time is precious in
this mode.
Flexible.Like the decisive style, the flexible
style focuses on speed, but here the emphasis is on adaptability. Faced with a
problem, a person working in the flexible mode will get just enough data to
choose a line of attack—and quickly change course if need be.
Hierarchic.People in the hierarchic mode do not
rush to judgment. Instead, they analyze a great deal of information and expect
others to contribute—and will readily challenge others’ views, analyses, and
decisions. From the hierarchic perspective, decisions should stand the test of
time.
Effective business professionals use a variety of decision-making
styles, ranging from decisive to flexible or hierarchic. By accurately
assessing a situation, you can choose the best style to make the appropriate
decision that enables your business to achieve its strategic goals. The style
you choose affects your subordinates and makes a difference in the overall
outcome.
Democratic
Using a democratic decision-making style at work involves allowing
your subordinates to vote. The majority vote decides what action you will take.
When you need to make a quick decision, the business impact is minimal and very
little research is required, this can work well. For example, deciding what
color to paint the office lobby can be decided by democratic vote with few
repercussions. You can take a vote by asking participants to raise their hands
or use email to get a count of votes
AuthoritativeWhen there’s a crisis, such as a natural disaster or other emergency
situation, effective business leaders use the authoritative or autocratic
decision-making style. Without input from subordinates, they make decisions,
such as evacuating from a dangerous location. In nonthreatening situations,
using this decision-making style can ultimately make employees feel
disenfranchised enough that morale suffers. Additionally, autocratic decisions
evoke strong response from individuals not included in the decision-making
process, so employ the autocratic decision-making style only in situations
where no other alternative proves reasonable.
ParticipativeWhen you have time, collecting input from your subordinates typically
generates a positive result. By running brainstorming meetings, conducting
focus groups or personally interviewing your employees, you get input that
could influence your decision, provide alternatives to consider and help you
make the best choice. Involving people in the decision-making process also
makes them more receptive to changes. However, when there is a crisis or when
the situation requires expert advice, this style produces less effective
results. Depending on the complexity of the situation, participative
decision-making can take a long time to complete.
ConsensusUsing the consensus decision-making style, business owners aggregate
information from their subordinates to make an informed choice together. Use
this approach when your decision directly impacts your employees and you value
their input. For example, if you need to make a decision about what information
technology infrastructure investments to make in the coming year, gather input
from not only technical experts and financial advisers but also your staff.
Together, you analyze the input to make a more educated choice. When you use
this approach, everyone agrees with the outcome before the final decision is
made. This can take considerable time, but working collaboratively typically
generates viable solutions to complex problems.
DelegationUsing the delegation decision-making style, you assign the
decision-making role to a subordinate or group of subordinates. Use this style
when you feel that you don't want or need to be part of the outcome, such as
choosing a restaurant for visiting clients or picking out office supplies.
Ensure that the group or a delegate reports back to you on what decision was
made. This approach also shows trust in your employees, which can boost their
sense of responsibility and increase morale.
DECISION
TREES
Decision trees are a simple, but powerful form of
multiple variable analysis. They provide unique capabilities to supplement,
complement, and substitute for
• traditional statistical forms of analysis (such as
multiple linear regression)
• a variety of data mining tools and techniques
(such as neural networks)
• recently developed multidimensional forms of
reporting and analysis found in the field of business intelligence
A decision tree is a graph that uses a branching method to illustrate every possible outcome of a decision.Decision trees can be drawn by hand or created with a graphics program or specialized software. Informally, decision trees are useful for focusing discussion when a group must make a decision. Programmatically, they can be used to assign monetary/time or other values to possible outcomes so that decisions can be automated. Decision tree software is used in data mining to simplify complex strategic challenges and evaluate the cost-effectiveness of research and business decisions. Variables in a decision tree are usually represented by circles.
Why
Are Decision Trees So Useful?
Decision trees are a form of multiple variable (or
multiple effect) analyses. All forms of multiple variable analyses allow us to
predict, explain, describe, or classify an outcome (or target). An example of a
multiple variable analysis is a probability of sale or the likelihood to
respond to a marketing campaign as a result of the combined effects of multiple
input variables, factors, or dimensions. This multiple variable analysis
capability of decision trees enables you to go beyond simple one-cause,
one-effect relationships and to discover and describe things in the context of
multiple influences. Multiple variable analysis is particularly important in
current problem-solving because almost all critical outcomes that determine
success are based on multiple factors. Further, it is becoming increasingly
clear that while it is easy to set up one-cause, one-effect relationships in
the form of tables or graphs, this approach can lead to costly and misleading
outcomes.
According to research in cognitive psychology
(Miller 1956; Kahneman, Slovic, and Tversky 1982) the ability to conceptually
grasp and manipulate multiple chunks of knowledge is limited by the physical
and cognitive processing limitations of the short term memory portion of the
brain. This places a premium on the utilization of dimensional manipulation and
presentation techniques that are capable of preserving and reflecting
high-dimensionality relationships in a readily comprehensible form so that the
relationships can be more easily consumed and applied by humans. There are many
multiple variable techniques available. The appeal of decision trees lies in
their relative power, ease of use, robustness with a variety of data and levels
of measurement, and ease of interpretability. Decision trees are developed and
presented incrementally; thus, the combined set of multiple influences (which
are necessary to fully explain the relationship of interest) is a collection of
one-cause, one-effect relationships presented in the recursive form of a
decision tree. This means that decision trees deal with human short-term memory
limitations quite effectively and are easier to understand than more complex,
multiple variable techniques. Decision trees turn raw data into an increased
knowledge and awareness of business, engineering, and scientific issues, and
they enable you to deploy that knowledge in a simple, but powerful set of
human readable rules.
Decision trees attempt to find a strong relationship
between input values and target values in a group of observations that form a
data set. When a set of input values is identified as having a strong
relationship to a target value, then all of these values are grouped in a bin
that becomes a branch on the decision tree. These groupings are determined by
the observed form of the relationship between the bin values and the target.
For example, suppose that the target average value differs sharply in the three
bins that are formed by the input. As shown in Figure 1.4, binning involves
taking each input, determining how the values in the input are related to the
target, and, based on the input-target relationship, depositing inputs with similar
values into bins that are formed by the relationship.
