Fundamentals of decision-making

Members that participated in the activity:

Learning Outcome 1: Definition of decision-making and an explanation of the role of decision-making for managers and employees

For managers: An effective manager relies on all six managerial competencies to make a decision. (Example: The manager of Toyota has the ability to envision transforming the company into the world’s largest car manufacturer . This illustrates his strategic action competency.

For employees: It gives each employee the opportunity to voice their opinions and share their knowledge with others.

In a nutshell, managers and employees base various types of decisions on the nature of the problem to be solved, possible solutions available and the degree of risk involved.

Learning Outcome 2: The conditions of uncertainty and risk under which decisions are made

Certainty

Certainty refers to a condition whereby individuals are fully informed about a problem, alternative solutions are obvious and there’s clarity concerning results of each solution. Both the problem and alternative solutions and well-explained and understood. Alternative solutions and their expected outcomes are identified, then the best solution Is chosen. Sometimes a problem has many possible solutions and it’s extremely expensive and time-consuming to calculate the expected results for all of them.

Middle managers, executives and different professionals are not involved in decision-making under this condition. However, first-line managers make decisions on a daily basis under conditions certainty or near certainty.

Risk

Risk refers to a condition whereby individuals define a problem, specify the probability of certain events, identify alternative solutions and state the probability of each solution leading to the desires result. Risk, as a rule, means that the problem and the alternative solution are between extremes, are relatively common and understandable, unusual and ambiguous.

Probability is the percentage of times that a specific outcome would occur if an individual were to make a particular decision menu times. The type, amount and reliability of information affects the level of risk and whether decision makers can use objective or subjective probabilities in evaluating results.

Objective probability

Objective probability refers to the possibility that a specific result will occur,  based on hard facts and numbers. Historical data is used to estimate future outcomes of a decision .

Subjective probability

The possibility that a specific result will occur, based on personal judgement and beliefs is known as subjective probability. These judgements are never the same due to individual's different intuition, past experiences, expertise and personal traits such as preference for risk taking. Changes in decision making can change expectations and practice. These changes change the basis for assessing the probability of an outcome from objective to subjective probability, even uncertainty.

Learning Outcome 3: The characteristics of routine, adaptive and innovative decisions

Routine decisions:

• People usually make a lot of decisions each day. Rather than thinking a lot for each decision, people instead rely on routines.
• These are decisions that need an introduction and identification then it becomes your regular activity.
• The nature of decision is taken regularly, therefore the answer requires no or very little consideration of an alternative.
• These decisions are usually sufficient, but they do fail, occasionally.
• The most basic of the different types of decisions but carries crucial importance
• A business may use routine decisions to purchase operating supplies, diversifying products and selecting distribution channels.

Adaptive Decisions:

• Made in response to a combination of moderately unusual problems and alternative solutions
• Adaptive decisions can only occur if there was a routine decision
• May not always be precise but can produce satisfactory solutions
• Convergence—a business shift in which two connections with the customer that were previously viewed as competing or separate come to be seen as complementary
• Continuous improvement—a management philosophy that approaches the challenge of product and process enhancements as an ongoing effort to increase the levels of quality and excellence
• An example of adaptive decision making can be a sports car manufacturer change from using steal or aluminium to using carbon fibre in order to make their cars much lighter, making the cars faster.

Innovative Decisions

• Based on the discovery, identification, and diagnosis of unusual and ambiguous problems and/or the development of unique or creative alternative solutions
• May take years to develop and requires inputs from professional specialists and teams
• Three forms of innovation for economic progress:
• Institutional innovation: includes the legal and institutional framework for business, such as deregulation
• Technological innovation: creates the possibility of new products, services, and production methods
• Management innovation: major changes in the way organizations are structured and how managers perform their functions
• The technological industry is probably the most innovative industry in the world because of its rapid growth and constant technological advancements. Advancements such as virtual reality and biotechnology

Learning Outcome 4: Explanation of how goals affect decision-making

How goals affect decision making

A goal is an observable and measurable end result having one or more objectives to be achieved within or more or less fixed time frame. Goals affect decision making both negatively and positively, setting goals too high may affect the entity negatively as they may not reach their goals.

Decision making is a process whereby you provide solutions to challenges in life.

The nature of goals

Goals are results to be attained and thus indicate the direction in which decisions and actions to be aimed.

There are two types of goals

1. Short term goals: something that you want to achieve soon, could be today, this week, next month or in a year
2. Long term goals: something that you want to achieve in future, such goals are important for a successful future

Why people set goals 

A lot of benefits can result from setting goals, goals focus on both individual and organisational decisions and efforts

It is most important that people set smart goals

Specific-the goal must be clear:

• What?
• When?
• How?

Measurable-You identify exactly what it is that you will see

Attainable- Investigating whether the goal is acceptable to you

Relevant- Is reaching the goal relevant to you, do you really want to run a multimillionaire entity

Timely- Set deadlines and ensure that everybody in the entity knows when the goals must be reached

General and operational goals

• General goals provide a direction for decision making in qualitative terms
• Operational goals state what is to achieved in quantitative terms- short term goals that bring an organisation closer to its goals

Role of stakeholders

Have important roles in making decisions, they have a high impact in the organisation and its employees.

Stakeholders are the customers, shareholders, suppliers that work with or within the organisation

Learning Outcome 5: The difference between the rational, bounded rationality and political methods of decision making

Rational Model:

This model lays down a sequence of steps that an individual or teams should follow in order to increase the likelihood that their decisions will be logical and sound.

The Rational model prescribes a series of steps that individuals should follow to ensure their decisions are sound and logical. It addresses how best to achieve the required goals such as the steps towards there and not the end goal itself.

The rational decision making is a process that consists of 7 steps:

1. Define and diagnose the problem
2. Set goals
3. Search for alternative solutions
4. Compare and evaluate alternative solutions
5. Choose from among alternative solutions
6. Implement the solution selected
7. Follow up and control

The steps include:

1. Defining and diagnosing the problem: Managers have to possess planning and administration competency that include identifying and monitoring numerous external and internal environmental forces and deciding which ones are contributing to the problem(s). Noticing - assessing the forces noticed and determining which are the causes of the real problem(s). Interpreting - relating those interpretations to the current or desired goals of the organization (Incorporating).
2. Setting goals: The team/individuals must set goals in place directed towards solving the problems. An example would be identifying that grades of a particular module that have fallen down, the real problem being lack of knowledge/information about the module from students and the goals set would be ensuring that lecturers deliver adequate and accurate information and allocating SI sessions.
3. Searching for alternative solutions: The team/individuals must look for alternative solutions through seeking additional information,creative thinking,consulting experts and doing some research.
4. Compare and evaluate alternative solutions: Determining the relative cost of each alternative solution.
5. Choosing from among alternative solutions: Involves making the final choice which may be difficult depending on the complexity of the problem and high degree of risk or uncertainty thereof.
6. Implementing solution chosen: The correct decision has to be accepted and supported  by those responsible for implementing it and it has to be acted on effectively.If not,another solution should be implemented.
7. Follow-up and control: Teams/individuals must control implementation activities and follow up by evaluating results.

Bounded rationality model

The idea that we make decisions that are rational but within the limits of the information that is available to us and our mental capabilities

Refers to an individual’s tendencies to:

5. Select less than the best goal or alternative solution(satisficing)
5. Engage in a limited search for alternative solutions
5. Have inadequate information and control over external and internal environmental forces influencing the outcomes of decision

Firstly, information is imperfect and individuals make decisions based on that information. Secondly, not all possible alternatives are evaluated by the individual before a decision is made.

The Model refers to an individual’s tendencies to do the following:

• Satisficing decision:

1. Limited Search
2. Inadequate information
3. Information processing bias

Political methods

Decision-making as political process highlights the goals, interests and values of external and internal stakeholders that are powerful. Powerful in the sense that they have the ability to influence or control individual, departmental, team or organisational decisions and goals. It describes the decision-making process in terms of a particular interest and goals of powerful external and internal stakeholders. This model mainly uses Power, as it is the ability to influence or control individuals, departments and teams making situations.

Having power is the ability to control these factors:

1. The definition of the problem
2. The choice of goal
3. The consideration of alternative solutions
4. The selection of alternative to be implemented
5. The actions and success of the organisation

The factors are interrelated as follows:

• Political decision making

1. Stakeholders
2. Choice of goals
3. Alternative solutions

• Stakeholders are people affect or be affected by the organization's actions, objectives and policies. Examples are creditors, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources.
• Choice of goals are the goals that people try to attain during a product selection and the attainment which determines the satisfaction with the decision-making process
• Alternative solutions is all or part of a goal design that demonstrates compliance with the goal code, but differs completely or partially from the acceptance or verification methods.

The factors affecting the political decision making include:

• Problem definition
• Divergence in goals
• Divergence in solutions