Organizational Decision Making
Organizational Decision Making
Decision making is a fundamental function of the management. It is the basic activity of the management. It reflects the success and failure of the management and the organization which mainly hinges upon the quality of decisions. The decision making role of the management is the ‘heart’ of the executive activities in the organization.
In the present day environment, organizations are faced with thousands of decisions daily, and how they make these decisions have an enormous impact on their performance level. These decisions set the tone for the entire organization in terms of image, profits and customer service. That is why it is very important that organizations adopt best practices and execute good judgment when it comes to making decisions. It is necessary since the right decision at the right time can help organizations achieve great success whereas a wrong decision can end up costing them dearly.
These days the role of managers includes a large amount of decision making and complex problem solving. The ability of the organization to take efficient and effective decisions can have a major impact on its sustainability and agility. Organizational management is to realize the significant positive impact of developing true decision competencies. This is only realized when solid, high quality decision making becomes embedded in the entire organization.
In the organization, managers at all the levels in the organization take decisions for the achievement of the organizational objectives. Decision making is one of the most important functions of the managers in the organization. It is central managerial activity. Making decisions is a matter of a huge responsibility for the managers not only for the organization itself, but also for the employees and other stakeholders, as well. Decisions set the tone for the entire organization in terms of image, profits and customer service.
The most important job of any manager is making decisions. It is also the hardest and the most dangerous. With decisions valued in their millions, a bad decision can cause damage the organization and the manager’s career which is irreparable. Fragmented and inaccurate data causes managers to make delayed and flawed decisions costing millions. Finding the right data at the right time and analysing it fast enough remains a challenge for the organizations as poor decisions can be very costly.
Decisions play a fundamental and crucial role within large organisations, and how the managers react can very well have a substantial impact on the performance of the organizations. Failure to make the correct decision can lead to huge financial loss, while on the other hand making the right decision can help to achieve a financial gain. The importance of the correct decision being made cannot be signified. Hence, all of the factors affecting decision making need to be considered when deciding on a course of action.
Decisions, when implemented correctly, are an opportunity to reposition and realign the organization for a better ‘fit’. Decisions of good quality are effective decisions and enable 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, poor quality decision can lead to the deterioration in the performance of the organization and result in corporate embarrassment, and large economic losses.
Decision making is normally considered to be a process. This process includes a group of procedures or steps. It begins with a definition of the problem or opportunity and ends with the achievement of the objectives. The process of the decision making has a systematic approach, and consists of seven steps, namely (i) appreciating of problem or opportunity i.e. identifying the decision, (ii) gathering of information and data, (iii) analysing of data and information, (iv) developing of alternatives, (v) evaluating the alternatives, (vi) choosing of the appropriate alternative, and (vii) taking action and reviewing the decision and its consequences.
The quality and speed of decision making is the key determinant of the success or failure of the organizational management. The identifying of the objectives, providing alternatives for solving the problems and the weighing and balancing the values and interest are crucial for the quality of decision making. This needs the risk analyses to discriminate between alternative. An important challenge for quality decision is to evaluate to what extend the managers utilize quantitative and qualitative criteria in decision making. However to do these actions, the managers need to have such skills as (i) to have the courage, (ii) to be rational, (iii) to prove creativity, and (iv) to balance the judgment. These skills influence the quality of decision making which in turn has positive effect on the organizational effectiveness.
Decision making is considered to be a choice among competing alternatives and the implementation of the chosen alternative. It is a process of making a choice from a number of alternatives to achieve a desired result. It is a cognitive process which rationally leads to the selection of a course of action among several available alternatives. It combines the mental process of perception, action, and coming to closure on stimuli. On the other hand, cognitive style is the patterning or linking of the thinking processes and coming to closure in the presence of ambiguity and uncertainty. All decisions have a time horizon or scope. Rational decision making means ‘making consistent, value-maximizing choices with in specified organizational constraints’.
The decision making process depends on the differences amongst managers’ values, attitudes, education, organization, managerial level. This difference in decision making amongst managers is also made because of the difference in experience, analytical ability, in forming perception and processing of information, scope of consultation, degree of freedom of choice, availability of resources and trust and rapport between the managers and the employees managed by him. The skills which are considered important to efficient and effective decision making are based on the normative model of decision making, which prescribes how decisions are to be made. These skills consist of (i) identifying the possible options, (ii) identifying the possible consequences which follow from each option, (iii) evaluating the desirability of each consequence, (iv) assessing the likelihood of each consequence and (v) making a choice using a decision code of practice.
The term decision making means a ‘commitment to action’. It can also be considered as the process of making intentional, informed choices between alternative actions which are possible. It is sometimes defined as ‘the product of intellectual processes resulting in the selection of a course of action between numerous options, leading to a final selection’. Decision making is an essential part of the organizational management and it occurs in every function at all levels, frequently taken in the face of uncertainty, conflicting objectives, value preference, and risk attitudes.
In the present day environment, decision makers are expected to make more decisions than ever before, frequently without much support and with a limited amount of time As the complexity of decision making increases, the issue of developing decision making capabilities remains a challenge.
Three important issues which determines the quality of the decision are (i) the importance of the decision, (ii) managerial level at which the decision is being taken, and (iii) the decision making style of the manager. Decision making style is important since it reflects the mentality or the way of thinking of the managers in the organization. Moreover, it explains how the managers use information and how they conceptualize and envision the future of the organization. Some of the important aspects related to the decision making are described below.
Types of decisions
Decisions are made at all levels in the organization. Some of these decisions are routine and common while the others are new and complex. Even though the value of improving any one of these decisions may not be significant, improving hundreds of thousands of these small decisions ultimately adds up to a huge yearly value.
The organization consists typically of three levels of management. These levels are (i) senior or strategic management, (ii) middle or tactical management, and (iii) operational management. Each of these levels has diverse information needs in order to support decision making and is also responsible for different kinds of decisions. Decisions can also be categorized as structured, semi-structured, and unstructured. Structured decisions are those which are recurring and regular decisions, where decision makers can follow a predefined procedure in order to handle them properly and efficiently. Semi-structured decisions are those in which only a portion of the problem has an obvious solution offered by an approved process. The unstructured decisions are described as new and non-routine decisions with a high degree of uncertainty. Such decisions need decision makers to provide judgment, assessment, and insight to solve the problem.
The unstructured type of decisions is normally associated with specific management levels. For example, the operational management level typically consists of thousands of structured decisions, which are routine and repetitive and have a predefined procedure for handling them efficiently. The tactical management level on the other hand, consists of hundreds of semi structured decisions, where only a part of the problem has a clear cut solution. However, the strategic management level consists of a number of unstructured decisions, which are new and non-routine with a high degree of uncertainty. Fig 1 shows the key decision making categories in the organization
Fig 1 Key decision making categories in the organization
Key factors in decision making
Managerial decision making is affected by a number of factors. A number of these factors can be listed as (i) objectivity, (ii) setting clear criteria and principles and standing by them, (iii) readiness to listen and consider other employees’ opinions, (iv) personal experience and contribution in the concerned area of operation, (v) confidence in their own ability and familiarity in the concerned area of operation, (vi) keenness to return to the decision making objective, (vii) aptitude to stay composed under pressure, (viii) eagerness to take risks, (ix) determination to search for the finest solution and (x) ability to stick by the decision.
These factors can either promote of hinder the organizational capability to make critical operational decisions. That is why, it is very important that managers incorporate as many of these factors into their decision making range.
Decision making style
Decision making style affects the acquisition, sharing, and utilization of the knowledge. The term decision style is the way a person uses information to formulate a decision. Decision making style of the managers depends on the quantitative and qualitative methods which they use to structure and clarify difficult problems and to explore the implications of pursuing different options. Decisions which take longer time than needed are normally made by the wrong people or in the wrong part of the organization or with the wrong information. These decisions turn out badly and are not the quality decisions. Involving teams efficient in generating and evaluating different alternatives of problems solving improves the quality of decisions most of the times. Sometimes the democratic decisions are not able to be made because of minority domination or time pressure.
Decision making style is still a cognitive process which includes personality of the people in relation to their needs, values, and self-concept. The decision making style normally reflects an individual characteristic for perceiving and responding to a decision making process. The style of decision making for managers depends on their learning process and experience. The differences among individuals when making a decision depend on two factors namely (i) information use, and (ii) focus, that is, the number of solutions considered.
The decision style framework is defined by three key factors namely (i) the way a person thinks about a problem, (ii) the way the person communicates to others, and (iii) the way the person expects others’ behaviour to affect his / her performance. The operational definition for the decision making style is a habitual pattern or preferred way of doing something which is consistent over time and across activities.
There are five decision making styles. These are (i) the decisive which means the use of minimum amount of information, rapid solutions, focus on efficiency, and consistency, (ii) the flexible which means focus on adaptability and several meaning and implications, (iii) the hierarchic which means thorough analysis and quality of outcome, focus on hierarchical relationships and mutual trust, (iv) the integrative which means that creativity and exploration are highly important, that is, the use of several ways to solve problems, and (v) focus on team work and co-operation and trust.
Need to make better decisions
Managers within the organization are frequently making bad decisions, solving the wrong problems and ignoring uncertainty. Managers make bad decisions and find it hard to decide because of decision biases, they do not want to give anything up nor do they want to make mistakes. That is why they postpone and only make decisions when events force them to.
Managers frequently solve the wrong problems because they lack a structure for making decisions. As a result, they do not generate value creating alternatives, they look for quick and partial solutions and they fail to seek out all the necessary data or clarify objectives. They also tend to ignore uncertainty since they focus on a single outcome, such as the most likely case, and take refuge in ambiguity or imprecise language. They use the complexity of uncertainty as an excuse for not deciding.
In order to truly realize the impact of organizational decisions, it is useful to look at some of the figures based on a study. The study shows that on average a person in a senior management position makes 20 critical decisions per annum each of which is valued at almost USD 10 millions. The failure rate for these decisions is estimated at 24 %, which means that the cost of wrong decisions adds up to nearly USD 48 millions. From these numbers, it becomes evident the huge impact which the organizational decisions have on the status of the organization. That is way it is very important that correct organizational decisions are to be made on a regular basis.
Furthermore, according to several studies there are a number of benefits for making better decisions, some of which are (i) increase in productivity and revenues and stock market values, (ii) return on investments, (iii) superior long term strategic positioning of the organization, (iv) improve customer and employee satisfaction, (v) improve decision quality, and (vi) improve communication.
Quality of decisions
There are six elements which are associated with the quality of decisions. In order to produce high quality decisions, each of the six elements is to be of the highest standard. As in the case of a chain, the overall quality of decisions is determined by the weakest link. The six elements associated with the quality of decisions are (i) meaningful and reliable information, (ii) clear values and trade-offs, (iii) logically correct reasoning, (iv) commitment to follow-through, (v) appropriate frame, and (vi) creative, achievable alternatives.
All of these six elements take part in the overall quality of a decision. Information which is reliable and meaningful contributes to the quality of a decision. Identifying values and trade-offs and applying logically correct reasoning help in generating better decisions. Being fully committed to the follow-through and execution of a decision also participates in the quality of a decision. Considering decisions within an appropriate frame adds to the value of a decision. Finally, identifying creative and achievable alternatives help producing a decision which is of the highest quality and efficiency.
Decision makers who can incorporate and integrate as many of these elements as possible in their decision making process are more likely produce better and well informed decisions. These six elements help ensure the quality of the overall decisions reached. Senior management and managers need to include as many of these decision elements in the decision making procedures to help ensure the quality and efficiency of the final decisions. Fig 2 shows the six elements associated with the quality of decisions connected together to form a chain.
. Fig 2 Six elements associated with quality of decisions
Organizational decision making
Organizational decision making is the process by which one or more organizational units make a decision on behalf of the organization. The decision making unit can be as small as an individual, e.g., a manager, or as large as the entire organizational membership. Even though organizational decisions are frequently influenced by personal goals, the decisions themselves are legitimized to other units and agencies as fulfilling organizational requirements. It is frequently being said that the organizational decisions do not relate to personal purposes, but for the organizational purposes.
The distinction between individual decision making and the organizational decision making is that individuals make decisions based on their own values and beliefs and whether something is appropriate or not, whereas organizations have different stakeholders and different sets of values which are incorporated in their process of decision making.
In organizational decision making, it is basic to involve stakeholders and uncover and reconcile their considerations or concerns. Devising search tactics and considering a range of alternatives is also important as is brainstorming. Such practices can help produce better organizational decisions.
Decision making is an important aspect of any organizational operations and marketing strategy. Organizations are faced with thousands of decisions on a daily basis, and how they handle and process these decisions can have substantial impact on their performance. For this reason, it is imperative that the organization has efficient, well organised procedures in place to handle such decisions. The organizational management is also to make a genuine effort to enhance the overall efficiency and quality of the decision making processes.
Organization can also strive to incorporate and adopt a number of best decision making practices in the operations and business strategy. The process of decision making consists of a delicate and complicated procedure which needs the organization to put a lot of thought and consideration into how it is to be designed. Organizations with good, efficient and well organized processes for producing decisions are more likely to generate better decisions, and as a result improve their productivity and performance. Such organizations have to closely monitor the decision making processes, as the quality of these processes can have a substantial effect on the overall effectiveness and efficiency.
Organizational decision making models
There are four organizational decision making models. These are known as (i) rational model, (ii) political model, (iii) garbage can model, and (iv) process or programme model.
The rational model describes an environment where organizational entities use information in a designed and rational approach to make selections on the part of the organization resulting in organizational decisions being made. Even though the rational model is an extremely important model, since it is publicly ascribed to and because it is frequently the target of those who support alternative models, it is simple to overlook that it is merely a model, an incomplete representation of what actually occurs.
The political or competitive model describes a setting where decisions are the results of the implementation of tactics and strategies by entities seeking to manipulate and persuade decision procedures in directions which lead to selections favourable to themselves. The political model highlights the fact that different participants in the decision process frequently have different goals and targets in mind.
The core of the garbage can model is that organizational decisions are consequences of interactions of problems searching for solutions, solutions searching for problems, and opportunities for making decisions. In other words, decisions in this model are made at random. The garbage can model highlights the roles of chance and timing in determining organizational choices.
The process or programme model depicts a setting where organizational decisions are the results of the processes and procedures of the departments involved. Seeing that the organization programmes and processes are slow to change, and since the effects of programming are hard to erase, decisions in this model can be predicted at any point in time.
Complexity of the organizational decision making
The Capgemini business decisiveness report in 2004 has produces a number of interesting findings about decision making within the organizations. The findings of this report are that the number of decisions expected of decision makers over an arbitrary period, the speed of decision making, and the degree of autonomy involved in decision making are increasing.
These findings establish a good context within which to understand the dynamics of decision making within the organizations. The findings also highlight the difficulty and complexity involved in the organizational decision making. That is why, it is imperative that the organization has efficient and effective procedures in place to handle decision making. It can also be very useful to incorporate a number of good organizational decision making practices into the organizational operations.
The Forrester tech strategy report in 2003 is a good source. Its significance is derived from the inclusion of a number of organizations in the study. The report draws out a number of relevant points which include (i) managerial decision making is influenced by the quality of data possessed by the organization and if the data is incomplete, inaccurate, fragmented, or inconsistent then it compromises the quality of the decisions made, (ii) decisions taken on the basis of poor data are likely to be of low value, untimely, out of synchronization with strategy and objectives, or just wrong, and (iii) the cost of poor decision making to the organization, both financial and opportunity is considerable.
These points indicate that complete, accurate, and consistent information is very important for the organizational decision making. The correct data at the appropriate time can help improve the capabilities of the decision making and eventually help produce better and more informed decisions. In contrast, incomplete and inaccurate data compromises the quality of decisions, resulting in poor decisions which can have considerable financial and opportunity costs associated with them.
The cost of the organizational decisions
A typical organization consists of three levels namely (i) operational, (ii) tactical, and (iii) strategic. Each of these three levels has its own decision makers and its associated cost of decisions. The operational level includes thousands of employees, who make around 2 million operational decisions per annum, each valued at USD 250. The tactical level comprises hundreds of middle level managers, who make around 200 tactical decisions per annum, each valued at USD one million. The strategic level contains tens of senior management personnel, who make around 20 strategic decisions per annum, each valued at USD 10 million. This brings the total financial impact of decisions to plus / minus 900 millions of USD annually. Fig 3 shows financial impact of decisions taken at different organizational levels.
Fig 3 Financial impact of decisions taken at different organizational levels
It is worth mentioning that even though strategic decisions are very costly as one wrong move can be disastrous and can cost the organization millions, operational level decisions are more crucial as they have a larger financial impact since they are made regularly on a daily basis. For that reason, it is very important to have proper, well-organized and efficient procedures and processes in place to handle the operations of the organization.
According to an enterprise decision making survey report in the year 2006, more managers are making more and more decisions, dealing with large data and handling complex decisions. This is because several organizations have started concentrating on the operational role, since the organizations are now operating in a more competitive environment.
The survey report also shows the top five casualties of poor decision making. These are (i) customer loyalty, (ii) organizational reputation among consumers, (iii) revenue, (iv) organizational efficiency, and (v) customer service.
Customer loyalty refers to how loyal the customers are to the products and services offered by the organization. If the organization does not treat its customers well or the products do not have the product quality needed by the customer, then the chances are that the customers do not do any business with the organization which results in a long term financial impact on the organization.
Organizational reputation is a casualty of poor decision making. A wrong decision can jeopardize the reputation of the organization and its image among customers. Profits are another casualty of poor decision making since the wrong decisions can have a negative impact on the organizational profits. Poor decisions also endanger organizational productivity and customer service. These casualties show how devastating poor decisions can be for the organization. That is why, organizations need to minimize if not eliminate poor decisions from their operational and marketing strategy.
Nine principles have been identified for the smart organization. These principles influence how people think and act. These principles work at numerous levels. These principles are in effect facilitators of best practice execution and, hence the basis for high quality decision making. Ultimately operational results are generated by the accumulation of many best practices, all completed in the correct strength of mind. Collectively these nine principles cover the world view necessary for regularly achieving high quality strategic decisions. Fig 4 groups the nine principles into three vital functions namely (i) those which help the organization achieve its purpose, (ii) those which make it feasible to mobilize resources, and (iii) those which help the organization understand its environment.
Fig 4 Nine principles of smart organization
The identified nine principles along with their three categories are (i) achieve purpose consisting of three principles of continual learning, value creation culture, and creating alternatives, (ii) mobilize resources consisting of three principles of alignment and empowerment, disciplined decision making, and open information flow, and (iii) understand environment consisting of three principles of systems thinking, embracing uncertainty, and outside-in strategic perspective.
How organizations make good decisions
A global survey performed by the McKinsey Quarterly in 2008 revealed that goal and objectives of organizational decisions include (i) revenue growth, (ii) cost savings, and (iii) improved efficiency or productivity. In order to make good decisions some basic mistakes are to be avoided at all cost. For example, if the same person initiates and approves decisions this leads to poor results, which points out the value of good discussion. In addition, the survey of McKinsey Quarterly has indicated that the organization is twice as likely to generate very poor results as compared to the good ones if they make decisions without any strategic planning process. One straight forward finding is the existence of a strong relationship between knowing full well who is in control of execution, and the participation of that particular individual in the decision making procedure and financial success.
The McKinsey Quarterly survey also showed that organizations not using best practices for the decision making can improve their decisions by following these rules namely (i) to pay specific attention to the risks of the project, not to mention the connection between those risks and different risks associated with other projects in the organizational portfolio and it is also beneficial to learn from comparable situations in the past, (ii) participants in the decision making discussion are to be included based on their skills and experience with the criteria for the decision is also to be clear and transparent, and (iii) to place organizational goal objectives in front of department’s goal and objectives, and to motivate efforts to build consensus throughout the departments.
Best practices in organizational decision making
The majority of organizations work hard to make their strategic decision making processes as thorough as possible. And when senior management is pleased with the result of the decisions,
It frequently rates the organizational processes highly when it comes to practices which avoid much favouritism, despite the fact that some do sneak in. The McKinsey Quarterly survey has highlighted some of the best practices for the organizational decision making. These practices include (i) balancing a mix of financial, strategic targets, (ii) long and short term considerations, (iii) realistic assessment of the execution capabilities of the organization, (iv) allowing truly innovative ideas to reach senior management, (v) practices are to be based on robust fact base, (vi) stakeholders to share all critical information, (vii) accurately forecasting market demand, (viii) aligning individuals’ incentives with strategic objectives defined by the decision, and (ix) actively seeking evidence contrary to the initial plan and factoring it in.
These are the best practices for the organizational decision making which highlight some of the finest processes and procedures for decision making. The organization can incorporate and integrate these practices in its operational and marketing strategies. These practices are the result of years of careful planning, design and trials which cultivated into a number of highly efficient and highly effective decision making processes. The organizations are to try to implement as many of these practices as it can in the decision making processes, in an attempt to help enhance the quality of their overall decision making, and as a result produce better and more informed decisions. These practices for the organizational decision making can help reduce if not eliminate some of the bad decision making which takes places within the organization.
Decision making is an important aspect of the organizational operations and marketing strategy. The organization is normally faced with thousands of decisions on a daily basis, and how it handles and processes these decisions can have a substantial impact on its performance. Because of this, it is necessary that the organization has efficient and well organized procedures in place to handle the decisions. The organizational management is also to make a genuine effort to enhance the overall efficiency and quality of the decision making processes. It is also to strive to incorporate and adopt a number of best decision making practices for the operational and marketing strategy.
During a survey conducted in 2003 by Forrester, only 23 % of the participants agreed on any one measure when asked about what future actions they need to take to enhance and improve decision making. This highlights the uncertainty of direction for several decision makers and the organizations. Several studies have highlighted elements of good decision qualities and smart organizations but there appears to be a gap in terms of guidelines, rules or framework for improving organizational decision making. There is currently no roadmap or methodology which enables organizations to make better decisions giving measures for future actions which can enhance and improve decision making. As a matter of fact, decision making continues to be a difficult process and the organizational management is required to adopt some strategies for simplifying the situation and make the decision making process simple and effective.