Introduction to Decision Making
Decision making is often portrayed as a coherent process in which different perspectives and interests are considered in systematic and orderly manner, with the view to select optimal alternative which may lead to achieve the desired results (Miller and Ireland, 2004). In simple words, decision making is the course under which various option are looken onto in order to chose a particular set of action. Thus, it is the consultative and collective process that supports day-to-day operations in turn leading the organization’s long term growth. Top level makes the strategic decisions to order to direct the future growth and success of the company, while the middle level of organization makes tactical decisions assisting their department and associated employees to perform effectively so that preferred organizational objectives are achieved (Garvin, 2006). On the other hand, employees at the lower level also make decisions regarding the conduct of their job or assigned tasks within specified time limit, improving their quality of work etc. Attributing to this fact, it can be said that decision making is the crucial aspect of every business which makes possible to sustain in highly competitive market and build the path to achieve the competitive success. Making effectual decisions is the prime ingredient in enhancing an organization’s effectiveness. Some eminent authors are of the view that decision making is fundamental activity of management having a close link with all functions such as planning, organizing, directing and co
Rationality Approach to Decision making
The most popular approach to decision making is rational model which lays emphasis on organization’s stability, effectiveness as well as the accomplishment of goals. This report from assignment desk assumes that each individual acts rationally, in order to achieve the desired goals . He is able to analyze the situation in order to make the optimal choice from the set of alternatives based on evaluation of the related consequences (Turpin and Marais, 2004). In addition to it, this model also states that decision maker has enough time to collect the relevant information, evaluate the alternatives and then to reach at solution. Thus, it comprises of four basic steps:
- Knowledge of available set of alternatives;
- Identifying the consequences of each alternative;
- Ordered preferences on the basis of which consequences will be evaluated;
- And lastly, rules through which specific alternative will be selected.
However, this model has some limitations of assuming that preferences are consistent and stable while in reality they change with time. Moreover, it also presumes that the decision maker is aware of all possible outcomes of a particular action, while in reality individual’s ability to find and process information is limited by available resources as well as his cognitive abilities and skills. Thus, it will be right to say that rational view is just a part of decision making process but not a whole process (Tierney, 2008). . This model can be applied to make the long term decisions that affect organization to great extent.
This model states that an organization is operating in the environment which is ever-changing and it involves interaction of various factors that in turn influence business operations. So, organization continually adapts and interacts with the dynamic environment. Further, this theory assumes that there exists a cause-effect relationship between decisions made and its consequences (Starbuck and Hodgkinson, 2008). Organization’s rules and policies are appropriate under different situations which in turn help in decision making. The contingency theory also suggests that while making decisions various factors that are internal and external to the firm are required to be considered. Moreover, these forces are also required to be take into account when management formulates policies and procedures. This theory is well –suited for the organization in the current business environment.
Bounded rationality assumes that the decision maker does not always have perfect and complete information and is thus bounded by their values and unconscious habits, reflexes and skills. This model is characterized by Bounded rationality of two different activities i.e. Satisficing and Searching. Under this, firstly the alternatives are searched and then sequentially evaluated. If the alternatives that have been selected satisfy the minimum criteria, then it is said to be satisfice and the further searching is terminated (Morcol, 2006). This model is based on the following assumptions
- Decision maker respond to problem instead of finding the reasons
- Individual is limited in terms of cognitive thinking and skills that requires in the search process.
- Time pressure exists due to which incomplete information may be used
- Judgment and intuition may be used to make decisions at certain times
Intuitive decision making approach
While making certain decisions, individual faces many challenges such as time constraints, uncertainty, ever-changing conditions etc due to which one does not have enough time to apply rational model. Thus, in such circumstances, they use intuitive model of decision making i.e individual follows his intuition to decide rather than any conscious or logical reasoning (Turpin and Marais, 2004).
System theory to decision making
The system theory to decision making suggests that in order to make effective organizational decisions, there must be a specific way of conducting the business operations and activities. This framework will assists management to make decisions that are optimal as well as productive. The process of decision making is complex due to presence of uncertainty in environment. For instance, a organization with the view to develop new product faces uncertainties such as whether the product will be successful among consumers or not. So to make effective decisions, it is required by business organization to carefully examine the various elements internal and external to firm and then make productive decisions which will lead to maximization of revenues (Shapira, 2002).
Brandenburger’s Use of Game theory
This theory suggests that mangers can use the policies and principles to formulate the new strategies for competing. This can be explained by taking the example of General Motors, an automobile company. The organization was facing the increased expenses because of retailer’s incentives. Company responded to it by allotting the new credit cards through which the card holder can apply a part of their charges towards purchasing the car. This action developed the new system for the company on basis of which the future decision making was made easy and efficient (Philip, 2012).
Decision making is highly influenced by the risks and uncertainties and thus it plays a major role in decision making process. However, there are many other factors that have huge impact on decisions. Many experts suggest that in complex situations along with the limited time and inadequate skills and conceptual power facilitate the decision makers to follow the bounded-rationality approach to decision making. In contrast, Herbert Simon views that individual will be able to make rational and economical decisions when he has adequate information (A brief history of decision making, 2006). It is also affirmed by researchers that there are various factors that are required to be considered before making decisions such as time factor, cost and budget, available resources, consequences of the all the alternatives etc. For example, if a firm wants to expand its market in international countries, in that case it is very important to considered the external environmental factors like political, economical, technological and social factors of the country in which the firm would prefer to operate. In addition to it, policies, financial budget are also required to be taken into account so as to become successful in that market. Again after deciding the country in which to set up the business, the organization in order to gain competitive success needs to formulate the strategies such as whether to operate alone to make strategic alliances or joint ventures with the domestic enterprises. This decision will be of utmost important for the organization as the growth and success in completely new market depends on how well the firm is satisfying the local consumers with its product (Daft, 2009).
There are several constraints on decision making which can either be internal and external that influences the decisions making of organization. It is thus essential for the firm to examine the internal and external constraints before making decisions. In contrast, if the organization takes decisions without taking into account any one of the factors; this will tarnish its prosperity greatly. For instance, a company came up with the new product and positioned it in market as high quality product. The organization didn’t consider the economic downturn and thus quoted the high prices for the same product. Eventually, the company faced losses, even its basic cost on product were also not recovered. This has further impacted its survival. Therefore with this illustration, it is clear that prior to make any type of decisions, it is essential to consider all factors (Henderson and McAdam, 2001)
Importance of decision making in organization
In the present highly competitive and dynamic environment, it has become critical for organizations to survive and sustain. A business enterprise is required to make decisions that will help in supporting the organization to not only survive, but also to attain competitive success. Decision making is the essential activity for enhancing the organizational effectiveness in terms of its operations as well as management (Lunenburg, 2011). From commencing the business to the end of it, decision plays a key role in each and every operations and activities. It also helps in formulating the policies and procedures on which the organization will operate providing the framework on which all business activities will be based with the aim to attain the goals. Thus, it is rightly said that decision making is the complex process that flows into every function of organization whether it is planning the process, organizing the operations and activities, directing the human resources or monitoring and controlling the entire organization process (Miller and Ireland, 2004).
The first step involved in decision making process is the identifying the problem and its causes, then developing the set of alternative decisions followed by evaluation on the basis of its consequences and other associated factors. At last, from the given alternatives, best one is selected and implemented (Tierney, 2008). This can be explained through example, like a restaurant wants to increase its customer’s base. After analyzing the market it was found that consumers are becoming more health conscious so they have reduced eating fast food. Now, the company in order to increase its customer base made decisions to add healthy food item in the menu which further helped in regaining the growth of restaurant. To decide the strategy with a view to entice more customers, the company analyzed the needs and preferences of consumers as well as the current trends in market. With the help of this, it made the decisions regarding introducing the healthy food items that not only facilitated increasing the customers base but also helped in gaining the competitive edge over other rivals (Tatum and et.al, 2003). Thus, with this example it is clear that sound decisions helps to prosper the organization in long run. Moreover, the decisions being the critical function of the management depends on availability of the right information at that right time. ctors The other aspect that is important as reflected in the above example is the analysis of the business environment that includes various factors like prevailing market trends and other social factors, economic factors, technological factors etc.
Decisions are basically classified into programmed and non-programmed. Former decisions are routine or repetitive that affects the daily operations of the organization and thus affects the smooth functioning of the organization (Morcol, 2006). While the latter decisions are non-recurring that is often made under the specific business situation. These decisions do not rely on particular rules or policies and require a deep understanding of the situation and critical thinking to overcome such situations. The other classification of organizational decision making can be strategic, tactical and operational. The strategic decisions provides the long term direction to the firm and help in attaining the desired goals effectively and efficiently while the tactical decisions are of medium term and are made in context with the strategies such as deciding on what marketing strategy to adopt, what promotional activities to be employed in order to gain competitive success etc. The operational decisions are short term and are based on routine activities. These decisions help in making the efficacies in organizational operations as well as its performance (Glassman and et.al., 2007).
In decision making is the pervasive process that takes place at every level of management. Effective decision helps an organization to avail the potential opportunities before competitors and thus to attain the competitive advantage (Philip, 2012). It also provides strategic direction to firm that in turn leading to accomplishment to desired goals. In the crises situation, when certain business issue arises that affects the functioning of organization, optimal decision making helps in exploring the better solution to the problem and therefore helps in offsetting it. In sum, it can be said that decisions when effectively made helps in gaining the long term survival and prosperity of the organization (Eikenberry, 2012). Decisions may not provide the desired outcomes many a times, but it would help in managing the risks to great extent.
In an organization, decision can be either made by individual or can be group based activity. Group decision making process can be defined as involving others in making decisions (Daft, 2009). It takes at different degrees based on the nature of issue which needs decisions. Generally, it is believed that involving group brings diverse views and ideas that in-turn helps in making effective and productive decision making providing desired growth and success.
From the above discussion on the nature and importance of decision making in the organization, it can be concluded that decision making is the critical activity for the management of every organization (Austin, 2006). As on one hand, sound decision will help the organization in achieving the desired success in long term, while the ineffective or unproductive decisions will tarnish the reputation of organization hindering its survival, growth and success in such contemporary market. In addition to it, decision making process requires various internal and external business environment factors to be analyzed beforehand. The constraints that are within the company are referred to as internal constraints (Eberlin and Tatum, 2007). These can be availability of the finance, company’s rules and policies, systems and procedures, employee’s skills and capabilities etc that facilitates decision making. On the other hand, external constraints are dynamic and uncontrollable, but they tend to affect the organization greatly. These can be governance, laws and legal policies of government, economic conditions, technology, needs and preferences of consumers, buying pattern of consumers etc. There are several theories proposed by different eminent researchers that guides the organization in decisions making process and helps in making the rational decisions. These theories can be applied in accordance with the existing situation and the type of decision (Elbanna and Naguib, 2009)
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