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Decision making in Companies

management, business, decision making, decision making in companies, administration, planning, organizing, directing, controlling, staffing

A decision is a choice whereby a person forms a conclusion about a situation. This represents a course of behavior about what must or what must not be done. It is the point at which plans, policies and objectives are translated into concrete actions. Planning leads to decisions guided by company policy and objectives and implies the selection from alternative objectives, policies, procedures and programs. The purpose of decision making is to direct human behavior towards s future goal. If there were no alternatives, there would be no need for a decision.

Types of decisions

A brief comment on some of the ways decisions can be distinguished is all that needed at this stage. Peter Drucker distinguishes between ‘tactical’ and ‘strategic’ decisions. Strategy can be defined as the behavior of management in trying to achieve success for company goals in an environment of competition. It is based upon the action, or possible action, of others. Strategies are solely calculated to implement plans and objectives, bearing in mind all manner of uncertainties, so that an advantageous position is attained over an opponent. ‘Tactical’ decisions are routine, usually contain few alternatives and relate to the economic use of resources.
Strategic decisions are made by management and involve ‘either finding out what the situations is, or changing it; either finding out what the resources are, or what they should be’. These include decisions upon basic objectives and may affect the productivity, organization or operation of the business.

Other classifications include a division between organizational and personal decisions:
1.Organizational decisions are those made in the role of an official of the company and reflect company policy;
2.Personal decisions refer to those made by a manager as an individual and cannot be delegated.

Another classification is between basic and routine decisions;
1.Basic decisions are long range in scope, e.g. the location of factory in a development area, or deciding what product to make. Wrong decisions on these matters can be costly;
2.Routine decisions are those which are made repetitively and need little thought.

A final, similar, classification by H A Simon distinguishes between programmed and non-programmed decisions:
1.Programmed decisions are those which are routine and repetitive and have procedures set up to deal with them. Risks involved are not high and they therefore can be more easily delegated. Assessment can often be made in quantitative terms and can therefore more easily be programmed into a computer;
2. Non-programmed decisions are new and non repetitive, where risks involved are high and they cannot easily be assessed in quantitative terms. There are many course of action possible and decisions made will mean a greater expenditure of resources.

The process of decision making in companies

A little earlier on in the chapter, it was stated that knowledge of objectives and policies is needed before decisions can be taken. Such decisions may be said consist of the following steps:

* define the problem to be solved;
* find alternative solutions;
* analyze and compare these alternatives;
* select the plan to be followed noting relevant factors;
* make the decisions effective by taking action to put the decision into effect.

Decision making really involves removing doubt. It involves having an objective to achieve and the tests of whether it is being achieved or not from the control criteria. Decisions involve the future and involve choice and they can be wrong. The point to consider is, who makes decisions in an organization, and what are the criteria in delegating some decisions to subordinates? These questions can be answered by finding out those decisions where the chances of being wrong are high and cost of correction is large; these can then be reserved for top management. Lower ranks would be allowed to decide where there was more certainly of being correct and the cost of correction is low.

One important point to consider is that no course should be taken that would create the need for a new decision after a short period of time. Research into how decisions are made has greatly increased in recent years; the results show that decision behavior is very complex and variable. Many decisions are made by managers from a certain number of factors they have considered. The reality of the situation is that there may in fact be many more factors unknown them that they should have considered.

Analysis of alternatives and their possible consequences can be assisted by techniques, particularly by mathematical models and the use of probability theory. Once a decision is made it needs to be accepted by staff, who must first of all have the decision communicated to them and then they must be motivated to implement the decision.

A few of the rules used today in making decisions are:
1. Minimax Rule – this is said to guarantee a minimum gain, or avoidance of maximum loss. This is often used when risks are high, or when a possible loss could be serious. If a stock controller observed this rule, he could hold too much stock which may be uneconomic, but he cannot be criticized for being out of stock;
2. Maximax Rule – is the opposite of the above, where the aim is the highest possible value of an outcome regardless of risks involved;
3. The Average Rule which is simply a midway between the other two rules.

It should be noted that, whatever decision criteria are chosen, decisions are affected by:
• the importance of the decision;
• characteristics of the organization;
• the personality of the decision maker;
• his/her state of mind when making the decision.

It may be useful to look at decisions in terms of systems theory. Any choice that induces flow, or changes in the flow rate, is a decision. Rates are where the action is, i.e. what takes place between levels in a system. An example of this is when a person withdraws money from a bank; the level of money in the bank has been reduced – therefore the action (decision) has caused a change from the previous state.

Another example is that if an accountant decides to stop credit to a customer (this action changes the flow rate), this is a decision in systems terminology. This can be further considered. If the flow rate continuous (i.e. of credit) it can be said that a decision has been made to let it continue.

Decisions result from a comparison of actual with standard. Some decisions are made without being influenced by man. For example, if the temperature outside a person’s body changes, then without any effort by man, his body temperature changes. The aim of the human system is to maintain standards; therefore any decision taken aims to effect changes in flow rates to move existing states in the desired direction.
Published: 2007-04-14
Author: Martin Hahn

About the author or the publisher
Martin Hahn PhD has received his education and degrees in Europe in organizational/industrial sociology. He grew up in South-East Asia and moved to Europe to get his tertiary education and gain experience in the fields of scientific research, radio journalism, and management consulting.

After living in Europe for 12 years, he moved to South-East again and has worked for the last 12 years as a management consultant, university lecturer, corporate trainer, and international school administrator

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