Effective Decision Making for Organizational Performance
Effective Decision Making for Organizational Performance
Decision-making is the selection of alternative course of action from available alternatives in order to achieve a given objective. Decision making is a matter of huge responsibility for the management since the performance of the organization heavily depends on the quality of the decisions made.
Management of an organization is saddled with the responsibility of leading the organization to achieve the objectives and the stated goals. This does not only require versatility and expertise, but also needs capability to make those decisions which provide effective outcome.
There is a profound misunderstanding about the link between decision making and the organizational performance. Contrary to popular belief, performance is not determined solely by the nature, scale, and disposition of resources, though they are important. The organizational success depends as much on the quality of the decisions its management and employees make and execute on the ground as it does on the operational facilities. The organizational structure produces better performance if and only if it improves the organization’s ability to make and execute key decisions better and faster than the competitors. For an organization to have a good performance, the challenge is to structure the organization in such a way so that its decision makers can make decisions which are better and more innovative.
It is seen in some organizations that how a lack of attention to the decision-making process can undermine the performance of the organization. Ultimately, the value of the organization is no more (and no less) than the sum of the decisions it makes and executes. Its assets, capabilities, and structure are useless unless its people throughout the organization make the essential decisions and get those decisions right more often than not. Effective at decision making and execution generate an excellent performance in the organization.
All the organizations have two types of critical decisions. They are (i) big, one-off decisions which individually have a significant impact, and (ii) small, routine decisions which cumulatively have a significant impact. It is important to identify which decisions are critical and then to categorize them. Only then, it is possible to figure out where in the organization those decisions are to be made. This requires an unbiased assessment of the benefits of scale and coordination versus the benefits of tailoring to local needs.
Some decisions are fairly easy to place. Decision placement is more of a challenge, which typically involves complex trade-offs. In many organizations, both the critical decisions themselves and where they are to be made can vary widely across the organization.
In decision-driven organizations, the challenge is to determine exactly the authority which the decision makers need, regardless of their organizational status, if they are to make good decisions and execute them effectively.
Decision-making has never been an easy job. It is increasingly challenging, especially, in the present day fast changing environment. In an era of revolutionary changes taking place in almost all the fields, the pace of decision making has assumed considerable speed and precision. Present day decision maker faces a host of tough challenges in addition to having to cope with high speed demanded by decision making in this digital age. Some of these challenges include (i) demand for making complex streams of decisions almost at the same time, (ii) the problem of making decisions on the face of uncertainties, and (iii) the making of complex decisions under perceptual decision traps.
Organizational performance in its simplistic state consists of the realization of organizational objectives. It is important that organization has measurable objectives since the organizational performance is assessed from the level of fulfillment of its objectives. The burden of achieving performance within the organization lies directly on the organizational management, and hence, it is required to make and implement decision/strategies which are effective in achieving the goals and objectives of the organization.
Decision making is a mental process which forces the decision maker to analyze the situation in order to master it or increase his knowledge in the area in which decision is to be made. Decision making is an important tool in every organization which affects the performance of the organization. Effective decisions are those decisions which produce the intended results.
Decision makers are required to develop the skills they need to make decisions quickly and translate them into action consistently. Good organizations mesh individuals’ capabilities with the organization’s decision making demands. They invest as needed to ensure that people have the skills required to be better decision makers over time.
There are eight different types of decisions which a decision maker is required to make (Fig 1). Each of these types tries to depict the nature, importance or duration of each decision. These eight types of decision include Ii) programmed decision, (ii) non-programmed decision, (iii) minor decision, (iv) major decision, (v) routine decision, (vi) strategic decision, (vii) individual decision, and (viii) group decision.
Fig 1 Types of decisions
In real life situation, many decisions are made with less than perfect information, inaccuracies and inadequacies of the information available. Also, there can be situations where the decision maker has to face outside interference (political, social, or regulatory etc.) while making the decisions. Due to these reasons, several times the decisions, which are made, are not effective decisions. These decisions have a substantial negative effect on the organizational performance.
Hence, for effective decision making, it is necessary that all necessary factors which are needed for the decision making are available and they are adequate in order to make a sound decision to deal with the situation that warrants it. Further, all the decisions have both the positive effect as well as the negative effects. A decision maker is to make such decisions which have minimal negative effect on the organization and its effective operation.
Effective decision making has two aspects. The first relates to the quality of the decision making, while the second relates to the implementation of the decision made. Many a times, the decision maker has made the right decision but due to the lack of manpower or proper communication channel to carry out the decision made the implementation of the decision suffers and the right decision becomes an in-effective decision.
The quality and speed of decision making is the key determinant for the effectiveness of the decisions and the success or failure of the decision maker. The goals identification, providing alternatives for solving the problems and the weighing and balancing the values and interest are crucial for the quality of decision making. This requires the risk analyses to discriminate between alternatives. An important challenge for effective decisions is to evaluate to what extend the managers utilize quantitative and qualitative criteria in decision making. Nevertheless to do these actions the decision makers need to have many skills namely (i) to have the courage, (ii) to be rational, (iii) to have knowledge, (iv) to have creativity, and (v) to have balance judgment.
A decision maker tries to be rational while making a decision. Rational decision making needs several conditions which include (i) the decision maker knows the objectives in the order of importance, (ii) the problem to be solved is important and unambiguous, (iii) the possible alternatives and consequences are known, (iv) the preferences are clear, (v) there are no constraints in terms of time or cost, and (vi) the final choice maximizes the attainment of the objectives. However, for many decisions, the decision maker does not have these conditions available to him.
Several times, decisions are made not by an individual but by a group of people. Group decisions are usually majority decisions. They are mostly compromised decisions. It is not necessary that group decisions are always the effective decisions. Despite its popularity, team decision making frequently fails to yield the expected gains in decision accuracy, and the process often results in lower effectiveness. The consideration of minority opinions when making team decisions is an important factor which contributes to effectiveness of the decisions.
Stability of environment has its influence on the effective decision making process. There is a negative relationship between strategic decision-making process and performance in unstable environment and positive relationship in stable environment. In a highly unstable environment, for effective decisions, it is necessary to follow the rational decision making process. Also, the need for achievement directs a decision maker towards making effective decision making.
Effective decision making conjures up the image of choice among alternative courses of action in a way appropriate to the demand of the situation. The ability of the decision maker to choose the best option that is capable of achieving the set objective or solving the problem demands structured decision guidelines. These guidelines put together are referred to as decision making strategies and are necessary for effective decision making. These decision making strategies are required to be followed by the decision maker to achieve the set goals of an organization. High quality and speedy decision making enhance the performance of the organization. There are nine important factors as given below which are to be followed by the organizational management for effective day-to-day decision making.
Delegation of power for decision making – Only inexperienced organizational management makes all the decisions itself no matter how small they are. Management needs to make only strategical decisions which have got significant impact on the organization. For effective decision making, management is to delegate the power of decision making down the line. Also, it is to be ensured that the decision making is not dumped on the management by the people who have the expertise and authority to make decisions.
Empowered executives are to take a position -When executives want to discuss a decision with the management, they are to come up with a well-considered position. Executives are expected to have expertise in their field and hence are better placed for making an effective decision in their field. Their ideas and expertize count a lot in effective decision making.
Swift action needed for decision making – Several occasions, decision makers has to take swift action for making decisions sometimes with incomplete information. Waiting for all the information to be complete before making a decision means risking of losing valuable opportunities. In such cases experience and the knowledge of the decision maker helps him in making effective decisions.
Changing of the bad decisions quickly – Admitting failure is difficult but refusing to change bad decisions is dangerous. For maintaining of the credibility and efficacy, quick reversal of bad decisions is essential before it is too late. Patching up a bad decision is like patching a broken glass ware. Patching of bad decisions means wasting organizational resources for a long time.
Assign a devil’s advocate – Some decisions, such as a major acquisition, are almost impossible to reverse and hence carry a big risk. Careful analysis and thorough discussion are critical. In such a case, a senior person is assigned to play the devil’s advocate, testing conclusions and identifying any weaknesses. This aids meaningfully the decision making process.
Timely communication of the correct facts – Rumours and distortions get started when the decisions are conveyed through second-hand. Communication of the details of the important decisions directly is very necessary. People are also need to know the basic reasoning behind each decision to facilitate comprehension, support and buy-in. This also helps while making better future decisions.
People are to be supported unless proven clearly wrong – Management is required to support the decisions of the people who have been delegated with the authority of the decision making. They are to be given credit if things go well and are to be supported if things go wrong. However, sometimes, a tough choice of overruling is necessary. In the case of overruling, it is important to explain reasons for overruling.
Overruling often needs avoidance – If the decision makers are using organizational strategy, objectives, and goals while making decisions, then most probably they arrive on the right decision. But, in case management finds very often at odds with the decision makers, then there is a problem. Frequent overruling of the decision maker is not desirable. At the same time, the decision maker needs support.
Balancing between these two extremes is critical to the success of the organization. At times, there are occasions when management is to make unilateral decision and move on.
Conducting of postmortem for a decision – The best way to know if a decision is the right one needs that a postmortem is conducted. Strategic decisions are needed to be re-examined through the regular review of key metrics and overall performance. Without a formal postmortem process, it is easy to avoid re-examining the issues or learning anything from the decision. With a formal postmortem, the organization can grow in its ability to make decisions.
Following of the above nine factors while making decisions can facilitate better decisions and dramatically improve the organizational performance. These factors helps the organization to have a process for dealing with decisions at all levels which in turn helps everyone to improve the decision-making abilities and hence, better support the organizational performance.
Complexities involved in decision making
In the present day environment, the decision-making is not a simple process. Instead it is full of complexities and problems. Knowledge of the following factors regarding complexities involved in decision making helps the decision maker to successfully navigate through difficult decision making process.
Multiple criteria – Typically, a decision is required to satisfy a number of criteria. These criteria include representing the interest of different groups, identifying stakeholders and balancing their conflicting interests and representing the interest of customers to retain their patronage. The issue of managing multiple interfaces of conflicting demands and interests is a nightmare for today’s decision makers.
Dealing with intangibles – Intangible factors such as customer goodwill, employee morale, and increasing bureaucracy often determine decision alternatives. Because these factors are intangible, they demand careful thought, tact and diplomacy to navigate through them successfully.
Long-term implications – Major decisions generally have ripple effect, with one decision taken today and then creating the need for subsequent decisions in future.
Inter-disciplinary Input: Decision complexity is greatly increased when specialists from different disciplines are to be part of the decision-making team. The views and fears of these specialists from different disciplines are to be weighed and analyzed before a decision is taken. It is a bit difficult to harmonize the views and expectations of specialists in different fields into one decision-making opinion. The idea of bringing-in many specialists from different fields to make a decision is also not liked many a times since too many cooks can spoil the broth.
Pooled decision making – In big organizations pooled decision making is a normal practice and it is a rare phenomenon that a single person is entirely responsible for the decision making process in totality. This is why there are board of directors, management teams, and various committees to look at specific issues in the organization. This pooled decision making is done for the purpose of sharing of the responsibilities. It is also thought that the knowledge base for making decisions improves in pooled decision making.
Risk and uncertainty – There is always attached with decision making a certain element of risk and uncertainty. Every decision alternative is having some chance that it may fail in some way. Poor choices can prove costly. Yet the right decision can open up new vista of opportunities.
Further in the present environment, the decision makers in an organization make decisions under two conditions namely (i) conditions of certainty, and (ii) conditions of uncertainty. A condition of certainty exists when there is no doubt about the factual basis of a particular decision, and its outcome can be predicted with a fair degree of accuracy. The concept of certainty is useful mainly as a theoretical anchor point in a range of likely and unlikely events. In an environment filled with uncertainties, certainty can only be relative rather than absolute. Condition of uncertainty exists when little or no reliable factual information is available. Decision-making under conditions of uncertainty is a great headache for the decision maker. The decision maker is forced to decide on some future event whose outcome cannot be predicted.
Frankenstein monster effect in decision making – The law of unintended consequences, according to experts on the subject states that ‘one cannot always predict the results of a purposeful action’. Although, unintended consequences can be positive or negative, it is the negative ones which are really troublesome and they are called the ‘Frankenstein monster effect’. This is a situation where an invention goes out of control to harm the inventor. Some decision makers give little or no consideration to the full range of likely consequences of their decisions. Although, unintended consequences cannot be altogether eliminated in today’s complex world of decision making, they can be moderated, to some extent, through creative thinking and careful consideration while making important decisions.
Decision making and concealed traps
Experienced decision makers assess the situation confronting them. Unfortunately, some managers are cautious to a fault before deciding on a course of action. They take expensive steps to defend against unlikely outcomes. Some of the decision makers are over-confident and hence, they under-estimate the range of potential outcomes. There are some other decision makers who are highly sensitive and, thus, allow notable events in the past to dictate their view of what might be possible now.
Decision making is very important for the decision maker. Making decisions is also tough and risky. Bad decisions can cause big damage to the organization. In several cases, bad decisions are traced back to the way the decisions have been made. The decisions might have been made without clearly defining the alternatives, or the right information has not been obtained, or the costs and benefits have not been accurately weighed. But sometimes, the fault does not lie with the decision making process but rather in the mind of the decision maker. The way the human brain works can sabotage the decisions.
It has been thought for a long time that a decision maker use unconscious routines to cope with the complexity integral to most of the decisions. These routines serve well in most situations. For example, in judging distance, people’s minds often rely on unconscious routine which equates clarity with proximity. The clearer an object appears, the closer people judge it to be. The fuzzier it appears, it is assumed that the object lies farther away. This simple mental shortcut helps the people to make the continuous stream of distance judgments required to navigate. Yet, like most routines, it is not foolproof. On days that are hazier than normal, the eyes tend to trick the minds into thinking that things are more distant than they actually are. Because the resulting distortion poses few dangers most of the people can safely ignore it. But for, say, airline pilots, the distortion, no matter how little, can be catastrophic. That is why pilots are trained to use objective measures of distance in addition to their vision to ensure precision at all times and to save human life.
A whole series of such flaws have been identified in the way people think in making decisions. Some are sensory misperceptions while others take the form of biases and yet many others appear simply as irrational anomalies in people’s thinking. These are called traps and they are dangerous because of their invisibility. Because they are embedded into the thinking process, people fail to recognize them and they fall right inside them.
For decision makers whose success hinges on the accuracy of day-to-day decisions they make, these psychological traps are particularly dangerous. They can dent the quality of the decision. While the decision makers cannot rid their minds of these ingrained flaws, they can follow the lead of airline pilots and learn to understand the traps and compensate for them. Some of the psychological traps which are particularly likely to undermine the decision making process are given below.
Anchoring trap – Anchoring is a mental phenomenon which leads the mind to give disproportionate weight or consideration to the first information it received. In other words, the initial impression received shapes (or anchors) the subsequent thoughts and judgment. In organizations, one of the most common types of anchors is past event or trend. The data relating to the earlier event become anchors on which the decision makers base their judgment. This approach, while it can lead to a reasonably accurate estimate, tends to give too much weight to past events and not enough weight to other current factors. In situations characterized by rapid changes in the environment, older anchors can lead to poor decisions.
Status-quo trap – Generally it is believed that people make decisions rationally and objectively. But the fact is that, all the people carry biases, and those biases influence the decisions making process. Decision makers display, for example, a strong bias towards alternatives which alter the status quo, or novel changes which takes people away from their present comfort zone. People, for example, prefer to live with the status quo and avoid taking action which upsets it. The decision maker often decides to rethink the matter later, but that ‘later’ usually does not take place.
Sunk cost trap – Another deep-seated bias in decision making is to make choice in a way which justifies or seek to correct the previous bad choice. For example, the organization might have spent huge resources earlier on some action which was later considered to be wasting of resources on a bad decision. The earlier past wrong decision becomes to which the economists term as the ‘sunk cost’. However, it is known that the sunk-cost is irrelevant to the present decision, but yet it preys on the minds of the decision makers, leading them to make inappropriate decisions at the present. People usually are not easily able to free themselves from wrong past decisions since they are unwilling to admit them a mistake.
In an organization, a bad decision is frequently a very public matter, inviting blames and critical comments from people. A corrective action taken for a bad decision is often considered by the people a public admission of poor judgment. It seems psychologically safer for the decision maker to let him stay on, even though that choice compounds the error and inflicts more injury of loss to the organization.
Sometimes, corporate culture reinforces the sunk cost trap. If the penalty for making a wrong decision which leads the organization to a loss is very serious, the decision makers are motivated to let failed projects linger on endlessly, in the vain hope that, some day in future, the invisible hand of nature is going to transform them into success.
It is to be therefore recognized that, in an uncertain world where unforeseen events are common, good decisions can sometimes lead to bad outcomes. By acknowledging that some good ideas can end up in failure, decision makers are to be encouraged to admit mistakes and own up to their own errors in all circumstances in order to save unwarranted corporate costs.
Concept of nice decision and unpleasant decision problems
A decision maker in an organization does not just make decision into the thin air. Every decision is based on solving a particular problem of the organization. The problem can involve performance of a particular task or executing a project. Traditionally, a problem is an unpleasant situation or something which creates worry, inconvenience and discomfort to the organizations. Hence, the decision makers first of all, identify the problem, define it, and then generate alternative courses of action for solving the problem. Decisions are then made on the choice of the alternatives which have the highest probability of solving the problem.
Recently, there is the emergence of a new concept in the decision-making and problem solving. This is the concept of ‘nice decision’ and ‘unpleasant decision’ problems. Nice decision problem is one which does not create worry, inconvenience or trouble to the decision maker, while, the unpleasant decision problem stands for a decision matter which creates, worry, inconvenience and trouble to the decision maker. These are elements of decision problems which provide joy and satisfaction to the decision maker. The decision maker relaxes happily while making the decision.
Decision making remains one of the most important functions of the decision maker. The success or failure of the organization depends, to a large extent, on the soundness and effectiveness of management decision making. Decision making involves a choice from many available alternatives. To choose the best alternative requires careful identification and deliberate assessment of all the other options. In the organization, the best decision is that which adds to the values of the organization.
Decision makers are constantly engage in critical thinking and logical reasoning which enable them to make the right decisions at all the times. If the decision maker is short of making right decisions in their day to day functions, the organization decays.
Decision makers make different types of decision every day. Sometimes these decisions are complex and opposed to each other thus demanding a compelling experience in balancing act on the part of the decision maker. Some of the major decisions the decision makers make on daily basis include (i) programmed and non-programmed decisions, (ii) major and minor decisions, and (iii) individual and group decisions.
Decision makers are to guard themselves against the decision traps which can lead them into wrong decisions. Wrong decisions are to be avoided at all times since they give rise to loss of resources, and waste of materials, and inability to achieve set goals and objectives.