Decision making in a business

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Decision making in a business

  1. 1. Decision Making in BusinessThere 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 of the 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 makingRational Model
  2. 2. The classical model of decision making is known as the rational model. Within this, decision making isseen 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 whichyou can be rational is limited.The bounded rationality model states that decisions need to be made within the constraints andpressures of organisational life, and so managers have to make the decision ‘that will do’. The term usedto 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 theeasiest or first decision possible. It may also result in managers continually using old decisions andapplying them to new situations if they know that the old decision would at least meet the minimumrequirements.Garbage Can ModelThis decision making model is particularly relevant to turbulent situations, and introduces the elementof chance or randomness. This model identifies four streams of activity and decisions are made whenthese 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
  3. 3. • Solutions – these are separate from the problems that they may eventually solve – answers looking for questionsThe choice opportunities act as a ‘garbage can’ for the other three constituents: participants, problemsand solutions.Decision TheoryDecision Theory looks at analyzing decision situations and is mainly used for situations in which there isone decision maker.Decision tree has the nature of the decision, source of uncertainty and the payoffs. Basic idea of adecision tree is to construct a decision tree, attach some values to the outcome indicated by thedecision tree and estimate the best outcome.The decision which should be chosen is the one with the highest payoff. This is referred to as thenormative theory. What the decision maker selects is known as the positive theory. In a perfect rationalscenario, 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 ModelThis is useful for approaching decisions in management that involve two or more parties. It can beparticularly relevant to decisions involving competitors – other companies who wish to trade in similargoods and services to similar customers.There are two main situations in game theory – Zero sum game and non zero sum game. In a zero-sumgame, 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 unclearwhether competitors will actually cooperate and to what extent. Therefore trying to predict thedecisions of competitors becomes important. Study and repetitive research into such games hasproduced ideas about how participants may behave.Game theory is useful for dealing with situations where outcomes depend on the interaction ofindividuals, rather than decisions taken independently. The decision making can be said to bestrategically interdependent.The reason for the decision making to be strategically interdependent is as follows.
  4. 4. • 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 isa proposed solution of a game – it is a combination of strategies that are believed most likely – so, infact, they are predictions.Refer to the note given in the study guide (Page 74 to 83)StrategyWhat is strategy?The pattern or plan that integrates an organization’s major goals, policies, and action sequences into acohesive whole. (Mintzberg)Mission StatementMission statement is a general declaration of the overarching purpose of the business, and is closelyrelated to the culture of the organisation.ObjectivesObjectives 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) andTime 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 toDrucker focus on profit as the only objective may endanger the survival of the organisation itself by not
  5. 5. focusing on the long term. Peter Drucker put forward eight areas which the managers could use tofocus on in terms of setting objectives. - Market standing - Productivity - Physical and financial resources - Profitability - Manager performance and development - Worker performance and attitude - Public responsibilityStrategy formulationThe 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 strategyCharacteristics 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.
  6. 6. • 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 environmentSWOT AnalysisSWOT refers to Strengths, Weaknesses, Opportunities and Threats. S and W are internal factors while Oand T are external factors. Organisation has complete control over S and O while the organisation haslimited control over O and T.
  7. 7. Boston Consultancy Group MatrixThis tool also allows a business to direct its business strategy. This looks at the products of a businessfrom two angles, market share and growth. This can also be a framework about short term profitabilityand long term sustainability.Different businesses will have different cash flows and thus the organisation would require a wellbalanced portfolio of such businesses to ensure longevity and survival. According to the model, thestrategic approach towards dogs is to disinvest or withdraw since the earnings will be low and therewould be no improvement in profits. Stars are good prospects and require investment to enable futuregrowth. Problem children have the potential to become stars but can also turn into dogs if not handledproperly. Cash cows are presently in a strong position and there is not much need to spend money onthem. However, the good cash flows from cash cows should be invested in stars and at times in problemchildren.The BCG-model has been criticised over the by researchers. Day (1986) is of the opinion that such amodel is not designed for developing new business opportunities and also tends to inhibit creativethinking. 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’sfundamental assumptions about the relationship between market share and profitability has also beenquestioned (Jacobson and Aaker, 1985).Strategic management literature advocates the matching of competitive strengths with environmentalopportunities for optimum resource allocation (Eng, 1999). The business and product portfolio conceptshave been a natural extension of this thinking, where a common feature of most portfolio models is thatone 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:
  8. 8. • 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 environmentSWOT AnalysisSWOT refers to Strengths, Weaknesses, Opportunities and Threats. S and W are internal factors while Oand T are external factors. Organisation has complete control over S and O while the organisation haslimited control over O and T.

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