Decision Making In Business

Decision Making In Business

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Decision Making

Decision making is defined as the selection of a course of action from among alternatives; it is at the core of planning. A plan cannot be said to exist unless a decision—a commitment of resources, direction, or reputation—has been made. Until that point, there are only P1anning studies and analyses. Managers sometimes see decision making: as their central job because they must constantly choose what is to be done, who Is to do it, and when, where, and occasionally even how it will be done. Decision making is, however, only a step in planning. Even when It is done quickly and with little thought or when it Influences action for only a few minutes, it Is part of planning. It is also part of everyone’s daily life. A course of action can seldom be judged alone because virtually every decision must be geared to other plans.

The Importance and Limitations of Rational Decision Making

In the discussion of the steps in planning In Chapter 4, decision making was considered a major part of planning. As a matter of fact, given an awareness of an opportunity and a goal, the decision-making process is really the core of planning. Thus, in t1is context, the process leading to making a decision might be thought of as (1) premising, (2) identifying alternatives, (3) evaluating alternatives in terms of the goal sought, and (4) choosing an alternative, that is, making a decision.

Although this chapter emphasizes the logic and techniques of choosing a course of action, the discussion will show that decision making is really one of the steps in planning.

Rationality in Decision Making

It is frequently said that effective decision making must be rational. But what is rationality? When is a person thinking or deciding rationally? People acting or deciding rationally are attempting to reach some goal that cannot be attained without action they must have a clear understanding of alternative courses by which a goal can be reached under existing circumstances and limitations. They also must have the information and the ability to analyze and evaluate alternatives in light of the goal sought. Finally, they must have a desire to come to the best solution by selecting (1w alternative that most effectively satisfies goal achievement.

People seldom achieve complete rationality, particularly in managing.’ In the first place, since no one can make decisions affecting the past, decisions must operate for the future, and the future almost invariably involves uncertainties In the second place, it is difficult to recognize all the alternatives that might be followed to reach a goal; this Is particularly true when decision making Involves doing something that has not been done before.

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Moreover, in most instances, not au alternatives can be analyzed, even with the newest analytical techniques and computers available.

Limited, or “Bounded,” Rationality

A manager must settle for limited or bounded rationality In other words, limitations of information, time, and certainty limit rationally even it a manager tries earnestly to be completely rational Since managers cannot be completely rational In practice, they sometimes allow their dislike of risk—their desire to “play It safe”—to Interfere with the desire to reach the best solution under the circumstances. Herbert & Simon called this satisfying, that is picking a course of action that is satisfactory or good enough under the circumstances Although many managerial decisions are made with a desire to “get by” as safely as possible most managers do attempt to make the best decisions they can within the limits of rationality and in light of the degree and nature of the risks involved.

We will now consider the steps of the decision—making process in detail.

Development of Alternatives and the Limiting Factor

Assuming that we know what our goals arc and agree on clear planning premises, the first step of decision making is to develop alternatives. There are almost always alternatives to any course of action; indeed, if there seems to be only one way of doing a thing that-way is probably wrong. If we can think of only one course of action, clearly we have not thought hard enough.

The ability to develop alternatives is often as important as being able to select correctly from among them On the other hand, ingenuity research and common sense will often unearth so many choices that none of them can be adequately evaluated. The manager needs help in this situation, and this help, as well as assistance in choosing the best alternative is found in the concept of the limiting or strategic lector,

A limiting factor is something that stands In the way of accomplishing a desired objective. Recognizing the limiting factors in a given situation makes it possible to narrow the search for alternatives to those that will overcome the limiting factors. The principle of the limiting factor states that, by recognizing and overcoming those factors that stand critically In the way of a goal, the best alternative course of action can be selected.

The Decision to Speed up the Decision-making Process at Granite Rock Co

The Granite Rock Company is a Watsonville, California, company that produces rocks, sand, gravel aggregates, and a variety of other products. The company was the 1992 winner of the much-coveted Malcolm Baldrige award, which recognizes outstanding performance in quality improvement.

Established in 1900, the company’s focus was on the “bottom line.” Employees knew It. and so did customers, who also felt that It was an Inflexible, centralized, bureaucratic firm. Bruce Woolpert, the company’s president and chief executive, recognized that it took too long to make decisions; indeed, it was felt that bureaucracy was killing the company. That started to change with the 1986 decision to turn the, organization chart upside down. Traditional organization charts show the president at the top and the customer contact people at the bottom. The change put the customers In. charge and on top. Three things turned the company around. First, all its employees discussed the current operation, and It was decided that special requests from customers would be granted, with the exception of illegal or immoral requests. Second, through surveys, customers were asked to rate the company from grade A to F together with written comments. Third, the company empowered customers to decide whether the company earned its pay. Specifically, the invoices stated:” If you’re not satisfied with the Granite Rock service or construction services you just received, then don’t pay us for it.” Because of it, the company became very much aware of what was wrong and consequently could make improvements. Many other companies go out of business without knowing the reason because most customers do not complain. At Granite Rock, the key 1986 decision of empowering the customer set the stage for the prestigious 1992 Malcolm Baldrige National Quality Award

Evaluation of Alternatives

Once appropriate alternatives, have been found, the next step in planning is to evaluate them and select the one that will best contribute to the goal.

This is the point of ultimate decision making although decisions must also be made in the other steps of planning—in selecting goals, in choosing critical premises, and even in selecting alternatives.

Quantitative and Qualitative Factors

In comparing alternative plans for achieving an objective, people are likely to think exclusively of quantitative factors. These are factors that can be measured in numerical terms, such as time or various fixed and operating costs. No one would question the importance of this type of analysis, but the success of the venture would be endangered if intangible, or qualitative; factors were ignored. Qualitative, or Intangible, factors are factors that are difficult to measure numerically, such as the quality of labor relations, the risk’ of technological changer or the ‘international political climate. There are all too many instances in which an excellent quantitative plan was destroyed by an unforeseen war, a fine marketing plan made inoperable by a long transportation Strike, or a. rational borrowing plan hampered by an economic recession These illustrations point out the Importance of giving attention to both quantitative and qualitative factors when comparing alternatives

To evaluate and compare the intangible factors in a planning problem and make decisions, managers must first recognize these factors and then determine whether a. reasonable quantitative measurement can be given to them. if hot6 they should find out as much as possible about, the factors, perhaps rate them in terms of their importance, compare their probable influence on ‘the outcome with that of the quantitative factors, and then come to a decision This decision may give predominant weight to a single intangible.

Marginal Analysis

Evaluating alternatives may involve utilizing the technique of marginal analysis to compare the additional revenue and the additional cost arising from increasing output. Where the objective is to maximize profit, this goal will be reached, as elementary economics teaches, when the additional revenue and additional cost are equal. In other words, if the additional revenue of a larger quantity is greater than its additional cost, more profit can be made by producing more. However, if the additional revenue of the larger quantity is less than its additional cost, a larger profit can be made by producing less.

Marginal analysis can be used in comparing factors other than cost and revenue. For example, to find the best output of a machine, input could be varied against output until the additional input equals the additional output. This would then be the point of maximum efficiency of the machine. Or the number of subordinates reporting to a manager might conceivably be increased to the point at which additional cost savings, better communication and morale, and other factors equal additional losses in the effectiveness of control, leadership, and similar factors.

Cost-Effectiveness Analysis

An improvement on, or variation of, traditional marginal analysis is cost- effectiveness, or cost—benefit, analysis. Cost-effectiveness analysis seeks the best ratio of benefit and cost; this means, for example, finding the least costly way of reaching an objective or getting the greatest value for a given expenditure.
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