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Importance of Decision making for Organizational Functioning

Importance of Decision making for Organizational Functioning

Organizations with different structures and functioning in different environments are to be managed. The maximum activity of the management is to make numerous decisions which can be either simple or complex in nature and can have a high or a low impact. Decisions of all types and sizes which range in importance from the ordinary to very crucial are being made on a continuous basis in every organization. It is very essential that the decisions are effective so that the organization can function in an efficient manner. Organization thrives on the quality and the variety of decisions which have been made over time. High quality and speedy decision-making enhance the performance of an organization.

Organization is a social entity, bringing together people who work together to achieve a specific goal. To reach it, it uses decision-making processes, so the organization is a centre of decision-making by excellence. The word decision is hence omnipresent in the life of the organization. It is subject to reflection and debate, since it conditions and shapes the very future of the organization.

A decision can be defined as the ‘the act of reaching a conclusion or making up one’s mind. As per another definition the decision is ‘a position or opinion or judgment reached after consideration. Decision can be tactical decision or strategic decision. In comparison with tactical decisions which affect the day-to-day implementation of steps needed to reach the goals, strategic decisions are ‘chosen alternatives that affect key factors which determine the success of the organizational strategy’. Effective decisions need a solid understanding of realities and social environment. Organizational management is confronted with various decisions to make on a daily basis. Some are small and have minor consequence, while others are big with a huge implication on the functioning of the organization.

Jones defines organizational decision making as the ‘process of responding to a problem by searching for and selecting a solution or course of action which creates the most value for organizational stakeholders’. Similarly, Daft defines organizational decision making as ‘the process of identifying and solving of problems’. Daft (2013) expands this definition further by looking at the two stages of decision making namely (i) problem identification, and (ii) problem solution. In the problem identification stage, information about the external and internal environmental conditions are monitored to determine if the organizational performance is satisfactory and to diagnose the cause of any shortcomings. The problem solution stage occurs when alternative courses of action are considered, and the best alternative is selected and implemented.

Decision making is a fundamental activity of the management. It is one of the most important, if not the most important, of all management activities. The decision making role is the heart of the executive activities of the management. The quality of the decisions and the way these are been made is highly dependent on the organizational management.  Decisions reflect the success and failure of the management and the rise or decline of the organization mainly hinges upon the quality of decisions being made. It is the management which sets the decision making process in motion and decides its direction and speed. The decisions decide the organizational strategies, and have a strong reflection of the way it operates. In fact, decisions being made are the barometer of the health of the organizational culture.

The quality decisions, when implemented correctly, provide an opportunity for the organization to reposition and realign to better ‘fit’ in the environment in which it is functioning. Accordingly, successful decision making enables the organization to maintain competitive position, align internal operations with external environment and survive threats and challenges, while conversely, because of their magnitude, a single, poorly made decision can lead to the speedy deterioration of the organization and result in corporate embarrassment, large economic losses for stakeholders or even bankruptcy. There are decisions of all kinds such as financing decisions, investment decisions, or operating decisions etc. which are made regularly in the organization. Decisions are mainly classified into three types according to the purpose of the decision or according to the importance of the problem. These are strategic decisions, tactical decisions, and operational decisions.

The strategic decision is normally taken by the top management. It concerns the main axes of development of the organization, and the relations of the organization with the external environment. This type of decision determines the future of the organization by setting the fundamental orientations which commit it in the long term.

The tactical decision is normally taken by the intermediate hierarchy. It aims at implementing the strategy, drawing up action plans, and correcting dysfunctions and, as a result, it concerns resource management and the effectiveness of their use in order to be able to monitor in the medium term development, for example, the improvement of a product.

The operational decision is normally taken by the operational managers and covers all the unforeseen events, particular situations which arise during the execution of the operations. The operational decision relates to the day-to-day operation with the aim of making the process of resource transformation to the products and / or services as efficiently as possible. These decisions are very frequent and their impact is short-term. It is to be noted that these decisions are not independent, but only hierarchical. Operational decisions, which are the most frequent in nature, concretize tactical decisions, themselves resulting from strategic decisions.

In this type of classification, the need for information intensifies each time one climbs a level in the pyramid. The characteristics of the requested information are specific to each level. Thus, the information requested for the strategic level is in nature (i) complex, (i) diversified, (iii) uncertain, (iv) quantitative, (v) qualitative, and (vi) of multiple shapes. This amounts to saying that, overall, the strategic decision is much more complex than the other two types of decision. Fig 1 shows the pyramid of this classification of decisions.

Fig 1 Classification of decisions

Decision making is defined as ‘a choice among competing alternatives and the implementation of the chosen alternative’. All decisions have a time horizon or scope. Decision making is a cognitive process which rationally leads to the selection of a course of action among several available alternatives. Rational decision making means ‘making consistent, value-maximizing choices with in specified organizational constraints’.

Decision making is normally influenced by different factors (Fig 2). The factors affecting the decision-making can be classified into four major categories namely (i) decision-specific characteristics, (ii) internal organizational characteristics, (iii) external environmental characteristics, and (iv) the characteristics of the management team. In most of the cases in an organization, decision makers (i) are normally assumed to be rational in certain given frameworks, (ii) normally lack complete information with regard to options, decision consequences and future preferences, (iii) are likely to have limitations in terms of both time and mental capacity, (iv) are assumed to have a limited capacity to process information, (v) are assumed to be influenced by emotions when making their decisions, and (vi) perception is assumed to be important in the sense that decision makers frequently operate along what they perceive.

Fig 2 Factors affecting decision making

Since the present environment in which the organizations function is highly competitive in nature, the importance of making wise decisions consistently throughout the entire organization has become a critical task for the organizational management. Yet despite the significance of this issue for the organizational management, only a few managements realize the importance of comprehensiveness of the decision making process and the quality of the decision making in the organization.

Decision-making is the one of the most important functions of management. It is central managerial action for managing different groups of the organizational activities. The major activities of the organization are (i) technical activities (processing materials, producing products), (ii) commercial activities (marketing, purchasing), (iii) financial activities (search for and optimum use of capital), (iv) security activities (protection of property and persons), (v) accounting activities (stocktaking, balance sheet, costs, statistics), (vi) managerial activities (planning, organization, command, coordination, control), and (vii) miscellaneous activities ( public relation, corporate social responsibility, employees’ safety, health, and welfare etc.). Whether the organization is simple or complex, big or small, these groups of activities or essential functions are always present.

Decision-making is strongly influenced by the structure of the organization and it produces the strategy. Further, decision making in the organization is mostly done at the top level of the management. However, it is important to note that not only top management makes decisions in the organization, but employees at every level in an organization also as well participate in decision . Making sound decisions is a crucial skill at every level in the organization. Many decisions in the organization are made by groups, teams, or committees. Moreover, all the employees are to be involved if they are to understand the need for creativity and if they are to be committed to the changing their behaviour at work, in new and improved ways. Employees’ involvement in decision-making serves to create a sense of belongingness among the employees as well as a congenial environment in which both the management and the employees voluntarily contribute to enhance organization performance.

The process of decision-making is not as easy as it sounds. In a classic work on the science of management of decision making, Simon, the noted management expert, has treated it as a process synonymous with the whole process of management. Essentially, for Simon, all managerial action is decision making. He has considered management equivalent to the decision making, and his major interest has been an analysis of how decisions are made and how they can be made more effectively. He has described three stages in the overall process of making a decision namely (i) finding occasions calling for a decision which is the intelligence activity (using the word in the military sense), (ii) inventing, developing, and analyzing possible courses of action which is the design activity, and (iii) selecting a particular course of action from those available which is the choice activity.

Normally, intelligence activity precedes design, and design activity precedes choice, but the sequence of stages can be much more complex than this. Each stage in itself can be a complex decision-making process. The design stage can call for new intelligence activities. Problems at any stage can generate a series of sub-problems, which in turn have their intelligence, design, and choice stages. Nevertheless, in the process of organizational decision making, these three general stages can be recognized. Carrying out of the decisions is also regarded as a decision-making process. Thus, after a policy decision has been taken, the management is faced with a wholly new set of problems involving decision making during the process of its implementation. Decision executing policy amounts to making more detailed policy.

It is normally recognized that the management does not have access to all the relevant information for making a decision. It neither has the expertise nor the capacity to process all the possible information available. Due to these limitations, management lacks the perfect knowledge of the decision situation. It is normally seen that the management actual decision-making can be described as repetitive and complex. It is also influenced by deviations and biases. Only in the minor cases of decision making, a common thread can be noticed between the problem definition and the choice of solution.

It is quite common that the goals of the management and the organization change with time. It is also very common for the management to discover its preferences through its actions and the experienced consequences of the actions. Hence, it is not always the case that management first specifies its preferences and then selects the appropriate action. The decision-making in the organization is frequently characterized by the problems, potential solutions and participants are being mixed in an erratic manner. By this reason, preferences, technology options, potential solutions, and participants do not always have a strong connection to the fundamental problem. Hence, it has been observed that objectives and means cannot be separated in the decision process, since they are entangled. Due to this, the decision maker has to evaluate the objectives and the means simultaneously.

In line, it has also been noted that the more rational the decisions of different participants are, the more likely it is that the decisions do not lead to action. When the participants in a decision making process perceive that the chosen alternative only constitutes one out of several possible options, this can lead to a lack of commitment. A similar effect can occur when the management discovers that the chosen alternative can lead to a variety of consequences which are difficult to predict. Hence, it is more likely that the participants in a decision making process are acting when they cannot see any alternatives and only expect good results. For this reason, irrational decisions more frequently lead to action.

However, there are occasions where management can make use of rational principles as an ideal and yet arrive at prompt and vigorous action. These rational principles normally assume that (i) the management is aware of all the options, (ii) management is aware of the consequences of all the options, at least in terms of probabilities, (iii) management has a consistent preference order for all the options, and (iv) management decision rules from which a single action can be selected. In real life, management frequently uses a model where it scans for information in two or more layers. This is done in order to eliminate alternatives. Rational techniques can normally be used as an ideal in situations where the political dimension is not so significant.

Decision making constitutes a verbal process which the management uses as an instrument to support its actions through creating visions for the future and mobilizing resources. It is frequently the case that the organization has different stakeholders and objectives which cannot be satisfied simultaneously. For this reason, it is common that the management is forced to present and support various visions at different times. This two-sidedness can sometimes help the organization to make controversial decisions which can result in forceful action. In addition, the decision making process creates responsibilities. If the management has contributed to a decision in public, it is also responsible for it. The way a decision process unfolds has an impact on how the organization as a decision-making body is perceived.

The decision making in the organization is not a stable and objective phenomenon. Instead, the organizational decisions are highly subject to how the management interprets them. Management creates meaningful interpretations of organizational decisions based on its impressions and experiences. It is these interpretations which form the basis of how the management subsequently acts in different situations. By this reason, organization operates in environments of human interpretation. This presumes that the information process is central to all the activities of the organization. Organization cannot be regarded as static system as it evolves continuously. This development affects ideas, impressions, data, values and practices. Due to this, development in the organization can be equated with a system of interpretation.

The importance of taking effective decisions is very easy to understand, but at the same time it is difficult to be achieved, since it needs reforms which modify both the decision-making style of the management and the organizational structure. The decision making process is familiar to all the employees, since it is being applied in almost all aspects of their work and private lives both at an individual or collective (organizational) level. It is normally assumed that all decisions lead to some results which diminish at least current issues. At a closer look, it seems that sometimes it is preferable not to act, instead of doing things in a wrong way, with unexpected consequences.

Some of the prerequisites for making a good decision are (i) to clearly identify the objectives or outcome the decision maker wants to achieve, (ii) to gather as many information the decision maker can for assessing the options, (iii) to elaborate several possible choices in accordance with the organizational values, interests and abilities, (iv) to reflect on possible outcome of each course of actions and estimate if it is acceptable, (v) to make a brief list of pros and cons, along with what the decision maker considers to be very important / important /less important, and (vi) to learn from previous experience and ask for opinions from those who had a similar situation to contend with. It is preferable that only after all these steps are completed, the decision maker makes the decision and monitors the results, to make sure the desired outcome is achieved. For simple and obvious choices decision maker can rely on intuition, but for those decisions which are complex and difficult to make, a closer look is needed.

Fig 3 Prerequisites for making a good decision

One myth of strategic decision making is the assumption that the people can and should make decisions as rationally as possible. Ideally, people make decisions by identifying and comparing options to determine which one produces the optimal result for a given set of situations. In practice, the erratic behaviour of human beings clearly demonstrates that people rarely act in a purely rational manner. Instead, people use so called ‘mental shortcuts’ to simplify and speed up the decision making process, based on previous experience, intuition or common sense. The decision-making process of the management, in most cases, is a combination of rationality and intuition. On one hand, it uses intuition to bind the range of possible solutions for a problem which is later analyzed with a rational approach. Similarly, it frequently follows steps from the rational model to verify the initial intuitive judgments.

In the present day fast changing environment, with lots of unfamiliar operational situations, experience becomes less relevant and intuition less reliable. At the same time, reasoning is also underused, since it is time consuming and needs ample information to be available. The question here is how to reconcile these two approaches which seems to be opposed in terms of strategic decision making. For real situations in the organization, intuition inevitably remains essential, because of the increasing intensity of the operations. Improving reasoning also remains important, using the information processed and shared by networks. Hence, for enhancing of the operational problem-solving, it is essential to merge these two ideas, to such an extent which make intuition more reliable and reasoning more time efficient.

People normally rely on their intuition because of the following reasons.

  • They are facing a time-urgent situation. In extreme situations, such as in emergency situations, even short delays caused by reasoning through a formal decision-making process can result in disastrous outcomes.
  • Conditions are dynamic or goals are ambiguous. If a situation is changing rapidly, then it makes sense to focus on a satisfying solution which can be quickly found. One can re-evaluate the situation when it changes and identify a new solution if needed.
  • They have a great deal of relevant experience. Because intuitive decision-making relies on a person’s ability to match a given situation to previous situations one has seen, the more relevant experience one has, the more likely one is to use intuition and use it effectively.
  • The problem can be modeled in mental simulations. Intuitive decision-making needs people to run mental simulations on what might happen if a given option is chosen. People can do this for a wide range of problems, some of which are fairly complex.

In contrast, people normally use a rational process because of the following reasons.

  • People are not under heavy time pressure. Stepping through a rational decision-making process takes more time than simply following a flash of insight. With more time, people are more likely to follow the rational approach, if only to verify an initial gut feeling.
  • Conditions are relatively stable and goals are clear. If a situation is not changing rapidly relative to the time needed to make a decision, then a rational approach for finding an optimal solution to the problem can be used.
  • People do not have a great deal of relevant experience. If decision makers’ experiences are not applicable to a given situation or insufficient to provide a basis for pattern matching, people resort to a more rational model to guide them through problem formulation, option identification analysis, and selection of a solution.
  • The problem is computationally complex. Although human beings have a remarkable ability to use intuition in complex circumstances, at some point complexity overwhelms the ability to grasp a given situation. At that point, the quality of decisions erodes along with the ability to recognize situations or run mental simulations.

For making effective strategic decisions, it is not enough to have good rational planning and resource allocation processes. The decisions account for a broader range of factors than those found in the analyses conducted at tactical level. Even if the results of the rational analyses offer valuable insights, management is to still compare possible options across operational, political, and economic value sets.

It is difficult to share to compare rationally the weights and prevalence of those conflicting value sets and to do so successfully require heavy reliance on intuition, judgment, and other non rational factors. Even so, the rational decision has a vantage point. Management is to rely in part on their intuitive understanding of the net effect of the decisions across multiple objectives, but it ought to do so while taking advantage of decision support which can better inform the intuition. In practice, there are two critical elements needed for effective strategic decision-making namely (i) clear, transparent, and well coordinated rational analyses of the alternatives from the decision support system, and (ii) sharp personal intuition and judgment.

The decisions are to be consistent with the organization’s broader interests. If there are situations when a rational decision is preferable (especially when the decision is not final and is to be endorsed by some high level committee) the organization is to encourage such behaviour among its employees (i) by providing standard operating procedures, (ii) by creating an organizational culture which promotes a rational set of values and norms, (iii) by establishing a formal chain of command for promulgation of authority and communications, (iv) by establishing programs for training and indoctrinating new employees, (v) by controlling access to information, and (vi) by dividing work among employees and / or employee groups.

Organizations do not make decisions, people do. This observation is a statement of both structural and operational fact. Organizations (as physical realities, not accounting or legal entities) are made by, and are comprised of, people. There can be transportation, transformation, technological, computation and communication infrastructures to support human decision makers. These infrastructures normally have differential impact on the people in question, affect what information they have access to, and so what decisions they make. Nevertheless, organizations are all created, supported, maintained and operated by these people. Thus, the issue of socially constrained, but nevertheless individual decision making lies at the heart of organizational decision making.

The studies done on the organizational decision-making processes are exhaustive and extensive. Six paradigms in organizational decision-making theory, which align more or less, have been identified. The first paradigm is the classical concept of prescriptive, analytical or bureaucratic decision-making, which claims that people collect and analyze information, eventually selecting an optimal solution from a range of alternatives. They do so by evaluating the advantages and disadvantages of each possible outcome and then choosing the one most appropriate to achieve their desired objective. However, in its original formulation classical decision concept assumes ‘pure’ rationality. Some tackles this assumption in accommodating the notions of risk or uncertainty in decisions. This approach is also an example of the normative decision concept. While this paradigm offers an apparent improvement over bureaucratic concept, it still fails to address the ‘mediating processes that lead to a decision’.

What Simon recognized while developing behavioural decision concept, the second paradigm is that decision-making is bounded by limits on time, cognition and information. Bounded rationality takes the realistic view which people make decisions which are ‘good enough’ rather than optimal, based on the limits of the information and knowledge they have.

A variant of behavioural decision concept, is the third paradigm of adaptive decision making concept which allows for natural dynamics in solving problems, finding that peple use a variety of problem solving strategies, depending upon personal traits or characteristics, and problem and social contexts (i.e. bounds on their rationality).

Building out of adaptive decision-making concept, the fourth paradigm, political or group decision-making recognizes that most decisions are made in the context of groups. The model revolves around the resolution (or not) of tensions between groups through power relations and the resolution of conflict by consensus.

The fifth paradigm offers a more pragmatic view of decision-making, which emerged shortly before the publication of otherwise comprehensive review, which is the garbage can model. The model does not conceptualize decision-making as a pattern of steps beginning with a problem and ending in a solution. Rather, independent streams of organizational events lead to outcomes or decision. The events can be problem ‘points’, potential solutions, opportunities for choice, or choices made by participants. These events are all mixed in the organizational ‘garbage can’.

Also post-dating Nutt’s work, but sharing many of the features of his ‘open systems’ model, is the emerging sixth paradigm of naturalistic decision-making. This paradigm shows the principal contribution which naturalistic decision-making makes is that it provides detailed descriptions of the processes through which individuals or groups make decisions, and the contexts within which such decisions are made. This approach has yet to enjoy wider adoption in organizational decision-making process. These six models offer a wide theoretical range from which to choose.

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