Decision Making in Business

There are two types of decisions namely programmes decisions and non programmed decisions.

Programmed Decisions – These are made in response to a situation that has occurred enough times to enable decision rules to be developed. These decisions are frequently made by lower level managers. The problems to be solved are usually well defined. Formal rules and regulations would be consulted to enable managers to choose the most appropriate course of action.

Non Programmes Decisions –These are made in response to situations that can be unique or poorly defined and largely unstructured. These decisions usually have important consequences for the organisation. Creativity is needed to find the best solution to this type of decision.

Stages in the decision making process

The decision maker needs to be consciously aware of the situation. This involves understanding the factors that affect the decision to be made, and recognising those elements which are out ofthe control of the decision maker, such as the constraints placed on the decision.

The decision maker needs to recognise the real problem. Before being able to develop a solution it is important to study and understand the problem fully, especially when multiple or complex problems exist. The decision maker has to be sure to get to the central issue and so make a decision that matches the real problem.

Information needs to be gathered and alternative solutions developed. This is a key stage and is vital if the best decision is to be made.

The best solution is decided on The decision is implemented. For successful implementation it is necessary for the decision to

be accepted by the organisation, because decisions relate to a chosen course of action that often requires the cooperation of others. Therefore communication may be important again, for explaining the decision and the reason for it.

The implemented decision needs to be monitored and evaluated. Any necessary changes or modifications need to be made.

Theories and models of Decision making

Rational Model

The classical model of decision making is known as the rational model. Within this, decision making is seen to be a rational and objective process to achieve predictable results.

Rational model assumes the following which reduces the extent to which this model could be used.

Decision makers have the necessary information to generate possible alternative options and to evaluate them

Managers have time to gather this information and do this evaluation Managers are therefore trying for a condition of certainty Managers operate in a stable situation where the variables are not changing Goals of managers and the strategy they are working to are defined and agreed Decision makers make rational choices by selecting the option that will bring most benefit.

Since the rational models of decision making have limited validity, decision making models based on ‘bounded rationality’ is put forward. Bounded rationality refers to a situation where the degree to which you can be rational is limited.

The bounded rationality model states that decisions need to be made within the constraints and pressures of organisational life, and so managers have to make the decision ‘that will do’. The term used to describe this is ‘satisficing’, the practice of choosing an option that may not be the optimal solution, but one that does satisfy the minimum requirements to achieve a goal or solve a problem.

One of the major problems with the bounded rationality model is that it can lead managers to make the easiest or first decision possible. It may also result in managers continually using old decisions and applying them to new situations if they know that the old decision would at least meet the minimum requirements.

Garbage Can Model

This decision making model is particularly relevant to turbulent situations, and introduces the element of chance or randomness. This model identifies four streams of activity and decisions are made when these four streams meet.

Choice opportunities – these are scheduled or unscheduled meetings where it is expected that decisions will be made

Participants – people who have the opportunity to influence decisions – they have different knowledge and experiences which may contribute to solutions of problems

Problems – possibly a result of a performance gap – these require attention

Solutions – these are separate from the problems that they may eventually solve – answers looking for questions

The choice opportunities act as a ‘garbage can’ for the other three constituents: participants, problems and solutions.

Decision Theory

Decision Theory looks at analyzing decision situations and is mainly used for situations in which there is one decision maker.

Decision tree has the nature of the decision, source of uncertainty and the payoffs. Basic idea of a decision tree is to construct a decision tree, attach some values to the outcome indicated by the decision tree and estimate the best outcome.

The decision which should be chosen is the one with the highest payoff. This is referred to as the normative theory. What the decision maker selects is known as the positive theory. In a perfect rational scenario, both these responses should be the same.

This model is based on two main assumptions – decision maker knows the possibilities and the pay offs.

Game Theory Model

This is useful for approaching decisions in management that involve two or more parties. It can be particularly relevant to decisions involving competitors – other companies who wish to trade in similar goods and services to similar customers.

There are two main situations in game theory – Zero sum game and non zero sum game. In a zero-sum game, a gain by one party will result in a loss being incurred by another party. In a non-zero-sum game, it may be possible for the parties to cooperate to increase the benefits to all.

However, within this type of game, making decisions about cooperation is difficult because it is unclear whether competitors will actually cooperate and to what extent. Therefore trying to predict the decisions of competitors becomes important. Study and repetitive research into such games has produced ideas about how participants may behave.

Game theory is useful for dealing with situations where outcomes depend on the interaction of individuals, rather than decisions taken independently. The decision making can be said to be strategically interdependent.

The reason for the decision making to be strategically interdependent is as follows.

The outcomes of one player’s decisions are dependent upon the decisions of other players and vice versa

Therefore, players need to take account of others’ decisions in making their own decisions if they have an interest in the outcomes and are to influence them accordingly.

There are two branches of game theory.

Cooperative theory assumes that communication and binding (enforceable) agreements can be secured between players, everyone shares the same objectives and is interested in the collective good – coalitions or groups of players are analyzed

Non-cooperative theory makes no such assumptions – it is concerned with situations where individuals are assumed to have self interested motives.

The object in game theory is usually to identify equilibrium outcomes to particular games. Equilibrium is a proposed solution of a game – it is a combination of strategies that are believed most likely – so, in fact, they are predictions.

Refer to the note given in the study guide (Page 74 to 83)

Strategy

What is strategy?

The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. (Mintzberg)

Mission Statement

Mission statement is a general declaration of the overarching purpose of the business, and is closely related to the culture of the organisation.

Objectives

Objectives should be Specific (should say exactly what it is), Measurable (should be able to measure it), Achievable, Realistic (should not be an over statement of the founders or the companies vision) and Time bound (a time frame has to be there – 3 years, 3 months etc.)

Therefore we say objectives should be SMART.

According to Peter Drucker search for one right objective is not very effective in reality. According to Drucker focus on profit as the only objective may endanger the survival of the organisation itself by not focusing on the long term. Peter Drucker put forward eight areas which the managers could use to focus on in terms of setting objectives.

- Market standing

- Productivity

- Physical and financial resources

- Profitability

- Manager performance and development

- Worker performance and attitude

- Public responsibility

Strategy formulation

The formulation of a business strategy is similar to that of the general decision making process.

Strategy makers first need to be aware of the current situation of the organisation as well as the external environment.

All possible strategies need to be identified and then evaluated.

The best strategy then has to be chosen.

A plan of action needs to be devised to implement the strategy.

Monitoring and adapting of the strategy

Characteristics of strategic decisions

Strategic decisions are likely to be concerned with or affect the long term direction of an organisation.

Strategic decisions are normally about trying to achieve some advantage for the organisation, e.g. over competition.

Strategic decisions are likely to be concerned with the scope of an organisation’s activities: does (and should) the organisation concentrate on one area of activity or should it have many?

Strategy can be seen as the matching of the activities of an organisation to the environment in which it operates.

However, strategy can also be seen as building on or ‘stretching’ an organisation’s resources and competences to create opportunities or to capitalise on them.

Strategies may require major resource changes for an organisation.

Strategic decisions are therefore likely to affect operational decisions.

An organisation’s strategy is affected not only by environmental forces and resource availability, but also by the values and expectations of those that have power in and around the organisation.

Analysing the environment

SWOT Analysis

SWOT refers to Strengths, Weaknesses, Opportunities and Threats. S and W are internal factors while O and T are external factors. Organisation has complete control over S and O while the organisation has limited control over O and T.

Boston Consultancy Group Matrix

This tool also allows a business to direct its business strategy. This looks at the products of a business from two angles, market share and growth. This can also be a framework about short term profitability and long term sustainability.

Different businesses will have different cash flows and thus the organisation would require a well balanced portfolio of such businesses to ensure longevity and survival. According to the model, the strategic approach towards dogs is to disinvest or withdraw since the earnings will be low and there would be no improvement in profits. Stars are good prospects and require investment to enable future growth. Problem children have the potential to become stars but can also turn into dogs if not handled properly. Cash cows are presently in a strong position and there is not much need to spend money on them. However, the good cash flows from cash cows should be invested in stars and at times in problem children.

The BCG-model has been criticised over the by researchers. Day (1986) is of the opinion that such a model is not designed for developing new business opportunities and also tends to inhibit creative thinking. According to Gelderman (2003), the strategic recommendation for dogs is too drastic, especially in the context of mature markets with slow growth rates. The validity of the model’s fundamental assumptions about the relationship between market share and profitability has also been questioned (Jacobson and Aaker, 1985).

Strategic management literature advocates the matching of competitive strengths with environmental opportunities for optimum resource allocation (Eng, 1999). The business and product portfolio concepts have been a natural extension of this thinking, where a common feature of most portfolio models is that one axis represents the environment and the other represents the organisation’s capability (Brown, 1991). Thus, the business and product portfolio models encompass three components of strategy (Barney and Griffin, 1992). These are:

- Distinctive competence of an organisation (this could be in the form of distinctive products, technology, delivery mechanisms etc.)

- Scope (range of markets where the organisation intends to compete)

- Resource deployment (distributing the organisation’s resources in the areas, markets or products identified).

In reality there are two broad reasons for the poor quality in decisions made by managers.

- focus on the short term

- tendency to implement solutions that have the least risk and have perhaps been used before.

Organisational Change

There are two types of change.

- Planned Change. This was discussed earlier with regard to management bringing about a change in to the organsiation.

- Unplanned change. This also involved strategic decision making, however are made as a result of certain circumstances as opposed to initiatives made by managers.

Some of the external triggers which require change includes the following.

- changing demand for goods and services

- threats from the competition, such as the updating of a product

- the entry of a new competitor

- the threat of takeover by a larger company or a merger with a competitor

- problems in the supply of materials needed for production

- financial changes such as interest and currency exchange rates

- lack of skilled labour

- changes in the technology available

- political and legal changes which affect the regulation of behaviour.

Some of the internal triggers are as follows.

- planned strategic change

- introduction of changes to organisational culture

- need to improve production efficiency, quality, supplier relations, use of personnel

- development of a new or improved product.

Types of strategic change

Organizational Development

OD is a long term effect led and supported by top management to improve an organisations visioning, empowerment, learning and problem solving process, through an ongoing collaborative management of organisation culture –with special emphasis on the culture of intact work teams and other team configurations – utilizing the consultant – facilitator role and the theory and technology of applied behavioral science, including action research.

OD programmes are aimed not only at improving organisation effectiveness and efficiency but also at motivational climate consisting of the set of employee attributes and morale which influence the level of performance.

Implementation of OD requires intervention strategies.

Survey Research and Feedback

o Involves the use of questionnaire surveys to help determine the attitudes of members to the functioning of the organisation.

T – Groups

o This involves small unstructured face to face grouping who meet without planned agenda or set activities. An informal training process is carries out. The objectives are usually to increase participant’s sensitivity to the emotional reactions in themselves and others.

Team Building

o It is a process of diagnosing task procedures and patterns of human interaction within a work group.

Grid Training

o Attempts to take the organisation to a 9, 9 orientation where the concern for results and concern for people are at the highest level.

Orgnisational Culture is also an important part of OD. Literature has identified three levels of cultures. In other words they have categorized the influence culture has on the organisation into three different levels.

- Level 1- Artifacts

o Physical appearance, language spoken and other overt elements

- Level 2- Values

o Cultural learning reflects someone’s original values - solutions about how to deal with a new task, issue or problem are based on convictions of reality.

- Level 3 – Basic underlying assumptions

o When a solution to a problem works repeatedly it comes to be taken for granted.

Types of organizational culture

- Power culture

o Depends on a central power source with rays of influence from the central figure throughout the organisation.

- Role culture

o Relies on the role within the organisation. For instance the functional areas.

- Task culture

o Job oriented or project oriented nature of the organisation

- Person culture

o This is where the individual is the central focus and any structure exists to serve the individuals within it.

Factors influencing the development of culture

- History

- Primary function and technology

- Goals and objectives

- Size

- Location

- Management and staffing

- Environment

Cultural web is another framework put forward to bring together different aspects for the analysis of organizational culture. Following elements are involved in it.

- Routines

o The ways that members of the orgniastion behave towards each other and towards those outside the organisation and this make up how things are done or how things should happen

- Rituals

o Special events through which the organisation emphasizes what is particularly important and can include formal organizational processes and informal processes

- Stories

- Symbols

o Logos, locations

- Power structure

- Control systems

- Organizational structure

Organisational Conflict

- Sources of conflict

o Differences in perception

o Limited resources

o Departmentalisation and specialization

o Environmental changes

o Role conflict

- Strategies for managing conflict

o Clarification of goals

o Resource distribution

o HRM policies

o Non monetary rewards

o Leadership and management

Managing the change process

Unfreezing

Refers to the process by which the forces which support existing behaviour in the organisation are reduced.

Moving

This is where new responses are developed based on new information. This can include new behaviours, approaches, values etc.

Refreezing

This is where the new behaviours established are accepted and established practice, processes or values within the organisation.

There are different ways to manage the change process.

- Education and communication

o where management spend time explaining the problems being faced and the strategy for overcoming, but this can be time consuming.

- Collaboration/participation

o where employees or special groups of them are involved in setting the strategy, but again this can be time consuming.

- Intervention

o parts of the change are delegated and different agents coordinate the process, so it is controlled but still participative.

- Direction –

o change is conducted through the use of authority, but employees are less likely to accept this.

- Coercion/edict

o change is forced through the overt use of power, but again employees are less likely to accept this unless in a crisis situation.

Crainer suggests that there are seven skills involved in managing change.

- Managing conflict- Interpersonal skills- Project management skills- Leadership and flexibility- Managing processes- Managing strategy- Managing their own development

Resistance to change is a very natural process according to Woodward. This is driven by a destruction to the habitual behavior, fear of the unknown, loss of freedom and economic implications.

According to Lewin Force field analysis can help manage the resistance to change. Force field analysis includes

- Analysis of the forces that will affect the change to the new organisational state or condition. There are seen to be two types of forces: restraining ones, such as the response of the people who disagree with the need for change, and the driving forces of the change.

- Assessment of which of these forces is most important.

- Action needs to be taken to reduce the most important restraining forces and to increase the most important driving forces.