The Decision-making process in businesses
INTRODUCTION
Decision-making is the critical key to the survival of an organisation, more so in this present time where we see economic boundaries between countries crumble and businesses become more complex, global and knowledge-driven. Managers need to ensure that their organisations are continuously innovated and improved in order to achieve and maintain a sustainable competitive edge. In fact, Potter (1985) highlighted that it is this competitive ability which is considered to be at the core of the success or failure of a firm. Managers realise that if their organisations are to survive in this dynamic and uncertain environment, they have to make decisions concerning new business opportunities, products, customers, suppliers, markets and technical developments. This clearly indicates that the most important managerial attribute is the ability to make the right decision. The outcomes of the decisions will be used as the benchmark to evaluate whether managers are successful or not. Therefore, the question that arises is how managers make decisions and whether they are rational or irrational.
DEFINITION
Stoner and Freeman (1989, p.165) defined decision making as "a process of identifying and selecting a course of action to deal with a specific problem or take advantage of an opportunity". Decisions are at the heart of any organisation, which relates to nearly every level of an organisation. Making-decision can be difficult for a number of reasons such as the organisational structure, human behavioural, organisational culture, uncertainties, incomplete information, multiple objectives, complexity of the problem and anxiety, which directly influence the decision making process. Regardless of the constraints, managers have to make decisions. Under any circumstances, decisions made cannot and must not be wrong because decisions are the mechanisms by which decision-makers try to accomplish the goals of the organisation; they are the means to an end.
Decision-making is utmost important to the organisation progression and development. Organisation progression from one development stage to another is known as "Organisational Life". The responsibility to steer the organisation from one stage to another lies in the hands of managers. Their capabilities as decision-makers are measured by their ability to find efficient and progressive solutions for further development. It is therefore arguably that the single most important thing decision-makers do. And on a personal note, the quality of his decisions determines his success in the organisation.
Huber (1980) stated that there are two approaches to management decision making. The first is concerned with the development and application of standard decision rules based on formal logic derived from data, which is called the programmed decision. The second, which involves descriptive accounts of how people actually go about making decisions and choices, is known as the non-programmed decision. Managers' utmost concern in the decision making process is to ensure that the decision yields optimal results and the same is expected for all the decisions made.
Decision making models are used to formulate alternatives for achieving the desired state of organisational goals. The process is known as decision making process. It is the process of choosing a preferred option or course of action from among a set of alternatives. The process often begins at the information gathering stage and deliberation until the final act of choosing. The entire decision making process consists of four stages; (a) Define and analysis problems - View the problem to identify the difference between current conditions and some future conditions. Collect and analyse data to confirm problem is real. (b) Generate potential solutions - This can be done many ways, including brainstorming, research and design alternatives. (c) Selection and planning the solution - Deciding which solution to select should be based on the achievement of objectives. (d) Implementation and evaluating the solution - The step often leads to an embedded decision process and thereafter, the progress is monitored to ensure the outcome is as per expectations. But whether the decision turns out to be a good one or a bad one depends largely on how through and accurate the decision-maker was in considering the alternatives and assessing the risks. The whole process can be categorised into four major stages. For the process flow, refer to Figure 1 on page 4.
Figure 1: DECISION MAKING PROCESS FLOW
Source: Stoner, A. F. and Freeman, R. E. (1989, p.166)
Generally, the above are the basic steps that a decision-maker operates upon to select an alternative. But one also need to know that the decision making process, like any other activity, has its own attributes, including effort, time, commitment and cost. The degree of reliance on the process depends were much on the complexity of the problem. Therefore, the rationality of decisions made is entirely in the hands of the decision maker because it involves his conceptual ability to visualise ...
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Figure 1: DECISION MAKING PROCESS FLOW
Source: Stoner, A. F. and Freeman, R. E. (1989, p.166)
Generally, the above are the basic steps that a decision-maker operates upon to select an alternative. But one also need to know that the decision making process, like any other activity, has its own attributes, including effort, time, commitment and cost. The degree of reliance on the process depends were much on the complexity of the problem. Therefore, the rationality of decisions made is entirely in the hands of the decision maker because it involves his conceptual ability to visualise the whole problem. In other words, the method that was applied to make decisions would suggest the rationality of the decision-maker.
RATIONAL MODEL
It may be naturally assumed that most of the important corporate decisions are made rationally. Management theory also implies that decision making is based upon an absolute version of rationality. The concept of rationality is defined as making explicit the objectives of a decision and then selecting that alternative action which will produce the desired result with the most efficient use of means. This must be true to a certain extent; otherwise nothing would get done in an organisation. Such an approach involves optimising the use of available resources in terms of generating the optimal result, which is why, the rational model is often presented as the pattern of decision making.
The rational approach tends to underline a normative view of decision making. According to Robbins (2002, p.74), rational decision making model involves (a) defining the problem; (b) identifying the decision criteria; (c) weigh the criteria; (d) generate alternatives; (e) rate each alternative on each criterion; and (f) compute the optimal decision. Based on the steps, the decision-maker identifies the problems or organisational goals and then defines alternatives in terms of the potential outcomes for each of the alternatives. For the model to be operative, assumptions need to be incorporated into the model.
Robbins (2002, p.75) notes six assumptions that rational theorists built into the decision making model. They are as follow:
i. Problem clarity - those problems are clearly identified and not ambiguous. The decision-maker assumed that all the information provided is complete and accurate.
ii. Known options - Basing on the information available the manager is able to identify all the relevant criteria and list the viable alternatives. He is also able to judge the possible outcome of each of the alternatives.
iii. Clear preference - The manager will rank each of the alternatives based on the predicted outcome.
iv. Constant preference - It's assumed that the specific decision criteria are constant and the weight assigned to the alternatives are stable over time.
v. No time or cost constraints - The manager believes that he can obtain the full information about criteria and alternatives because it is assumed that there are no time or cost constraints.
vi. Maximum payoff - Based on the ranks that were assigned to the alternatives, managers believe that they will be able to choose the alternative that yields the highest perceived value or optimal result.
Based on the above assumptions, the value of each outcome is computed and weighted by the probability of its occurrence. This is to ensure that the conditions of certainty, uncertainty and risks are taken into consideration by the manager to arrive to an optimal decision. At the end of the process, the manager will choose the alternative that is most likely to yield the optimal result. This form of optimising decision making is described as rational decision.
The straightforward application of the concept of rationality results in an open selection of alternatives that are to be used to resolve problems. In the rational decision making model, it is clearly seen that the characteristics of the decision-maker and of his organisation culture are not seen as having an influence on his selection of an optimal course of action. Rational theorists are also under the impression that people can be controlled and their behaviour can be predicted.
It is quite evident in the studies conducted by conventional management gurus, the rational model concept was applied in their decision making process. The model was applied in the scientific management in the late nineteenth century. Scientific management, also known as Taylorism after its pioneer, Frederick Taylor, involved the breaking down of jobs into a series of steps, which could be performed by a number of different operatives doing repetitive tasks. This de-skilled and dehumanised (turning human into robots) the work and it was known as the rationalisation of works: the organisation of work without regard for the people who did it. People were deemed as another resources in the production process like raw materials and machinery.
BOUNDED RATIONALITY
Stoner and Freeman (1989, p.176) also defined "bounded rationality as the concept that managers make the most logical decision they can within the constraints of limited information and ability". Simon pioneered the effort to understand how real decision situations do individuals and organisations handle, and in what ways such processes differ from the rational comprehensive model. In his studies, he pointed out that the rational decision-makers reduced the complexity of decisions by incorporating assumptions into the decision making process to develop alternatives. He argued that decision making is only rational up to a point. He further went on to say that that managers would not be able to make a rational decision that yields the optimal result. In actual fact most of the decision making is 'bounded' due to human limitations and failings. He cited the following constraints faced by decision-makers when applying the rational model in their decision making process:
* Inadequate information about the nature of the problem and its possible solution;
* The lack of time or money to compile more complete information;
* Distorted perceptions of the information available;
* The inability of the human memory to retain large amounts of information; and
* The limits of their own intelligence to determine correctly which alternative is best.
The bounded rationality model recognises the limitations of the individual's rationality. Due to constraints, the management's decision making is rarely optimal in the sense of the best solution being sought. In practice, the decision-maker does not maximise utility but rather satisfices. This means that the rational decision-maker searches for an acceptable choice, one that satisfies a minimal set of requirements. Instead of reviewing all possible alternatives, the "satisfacier" will usually pick the first alternative that meets this minimal set of requirements. Simon argued that people attempt to achieve the best outcome for themselves, but that their actions are guided by a bounded rationality. That is, rational choice is limited by the capacity to process information. In other words bounded rationality is using limited information and limited analysis so as to obtain the first acceptable decisions rather than the best possible solution. While optimality of solution has been the main concern of the rational theorists, under bounded rationality condition decision-makers' concern would be for any alternatives that could resolve the problem. The alternative chosen need not necessarily produce the optimal result.
Using the bounded rationality model as a stepping stone, other descriptive models have been developed. Tversky and Kahneman expanded on Simon's ideas on bounded rationality and brought about the heuristic principles known as the rules of thumb.
WHAT IT MEANS
The rational decision making model depicts a simplistic picture in resolving processes and achieving organisational goals. It makes the whole process so mechanical. It calls for information of all the alternatives that are open to choice. It also calls for the complete knowledge of, or ability to compute the consequences that will follow on each of the alternatives as well as certainty in the decision-maker's present and future evaluation of the consequences, in terms of some consistent measure of resources. There is also no time frame or cost constrains involved in the process. As for the choice, it was to yield the optimal result. But in reality the task of decision-makers are not as simple as it seems. The increasing complexities in the fast moving business world of today have made their resolution more difficulty. Gray & Stark (1988) captured this progression rather well; " It used to be that the field was replete with simplistic, prescriptive formula designed to give managers an off-the-shelf approach to change. Today, however, it has become one of the most complex areas in the field of organisational behavioural". The statement reflects correctly the demanding nature of the business world of today and the part on the human behaviour exhibited within an organisation.
In this current business environment, organisations depend upon a multiple of objectives for its progression or advancement instead of a single objective. Multiple objectives can complicate the rational model. Multiple criteria might be to balance the comfort of the progression, the length of the direction and the time taken to implement it. The decision-maker must assign weights to each of these three criteria of how important each is compared to the other. Given these weights a new optimal alternative can be chosen. While the decision still appears to fit the rational model, assumptions have now been built into the situation. But the assumptions are based on the values and preference of the decision-maker.
There are also times when problems do not have one solution and are more open-ended. There may be no one answer that could be described as correct. For instances, how should a new spicy flavoured pizza (The Maharaja's) be advertised? Creativity comes into action when generating ideas on how to send the message across to the general public. These types of tasks are non-programmed in that they cannot be entered into a computer program for the machine consideration of alternatives and choices. For non-programmed tasks it is much more difficult to even attempt to appear rational. In this situation, the assumptions of the decision-maker are much more visible as he needs to visualise how the audience would react to the advertisement.
Decision-makers in organisations can decide rationally with the use of computer software in processing information. They generate and explore only a limited number of decision alternatives and use their pre-existing knowledge and simple rules of thumb, called heuristic, to make decisions. It shows that decision-maker at times acts with incomplete information. In this instance, the term "satisficing" could be used to describe the decision-maker's choice. He decides on of the first alternative that meets the requirement to the problem at a satisfactory level.
Decision-makers sometimes make decisions based on their intuition. This is usually called deciding by gut feeling. These intuitive decisions may be seen non-rational because they do not follow the traditional rational model. Using emotion in decision making is quite often seen as irrational. In organisations, relying on emotions is usually not seen as an acceptable way to decision making. Though it is not a preferred method, it is widely being used in making decision.
Decision-makers are also prone to errors when perceiving and analysing their organisation. For example, people are able to recall events that are recent or more vivid in their memory. This is bias due to ease of recall. Also they do not pay enough attention to the effects of change or sample size when evaluating the important data.
Two other biases to which decision-makers are subject to are called the confirmation trap and hindsight bias. When falling into the confirmation trap, decision-makers look for information that supports what they think is true. Also, they do not look for information that would refute their decision. With hindsight bias, people are likely to overestimate the degree to which they would predict an outcome once they have been informed that the outcome has indeed occurred.
One other factor that influence the decision making process is the organisational culture. Organisation culture is the most important ingredient in the decision making process because a decision-maker is bound by the culture of the organisation he/she works for. The decisions made should be in line with the culture of the organisation, otherwise the decision-maker would face resistance.
The lesson that can be drawn from the above is that the decision making process is not a simple process in most cases. It may be true for a programmed problem but not for a non-programmable problem. The human behavioural traits of a decision-maker and the organisational culture in which he/she works for will influence the decision making process.
CONCLUSION
Following on the account of the decision making process between rational and irrational, are somewhat presented opposing factions. In actual fact, both are interacting factors in the decision making process. I would term rational as logical (make sense) and irrational as emotional (human behaviour). The logical approach assists in setting goals and provides effective steps to accomplish them. Emotions, on the other hand, are cognitive sensations that correspond to our successes and failures in reaching goals. Therefore, the notion of decision making as a rational process is not exactly correct. It is a human process constrained by the limits on ability and inconsistency of social life.
The fact is, managers must solve problems and make decisions. Whether a manager is rational or irrational in decision making depends very much on the type of problems and the conditions under which they must be solved. Decision making approaches therefore must be tailor-made to fit a particular situation. In other words, there is no one standard approach in making decision.
REFERENCE
Gray. J. and Strake. F. (1988), Organisational Behaviour, Columbus, Ohio.
Huber, G.P. (1980), Management decision making, Glenview, IL. Scott, Foresman and Co.
Porter, M.E. (1985), Competitive advantage, New York, Free Press.
Robbins, S.P. (2002), Essential of Organizational Behavior, 6th edition, Prentice-Hall Inc. A Pearson Education Co., Upper Saddle River, New Jersey, pp. 74 and 75.
Stoner, A.F. and Freeman, R.E. (1989), Management, 4th edition, Prentice-Hall of India Private Limited, pp. 165 - 167.
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Robbins. S.P. (2002), "Foundation of Individual Behavior", "Individual Decision Making", Essential of Organizational Behavior, 6th edition, Prentice-Hall Inc. A Pearson Education Co., Upper Saddle River, New Jersey, pp. 14 - 29 and 73 - 86.
Simon. N.A. (1978), "Rational Decision-Making In Business Organizations", http://www.nobel/economics/lauret/1978/simon_leature.pdf.htm, pp.343 - 371, retrieved on August 20, 2003.
Stoner, A.F. and Freeman, R.E. (1989), "Problem Solving And Decision Making", Management, 4th edition, Prentice-Hall of India Private Limited, pp. 163 - 187.
