DECISION MAKING  

The thought process of selecting a logical choice from the available options.

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.

Ä   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.”)

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.