There is no end to the number of avenues wherein one’s decision-making skills come handy. A few of the examples from everyday life include the time when an organization hires new employees, or select the suppliers whose services they intend to avail from their catalog. Similarly, sound decision making is called for when deciding upon the best-suited marketing strategies for a business or defining the direction in which a company intends to progress.
What is good decision making?
In the workplace, decision making is a key skill. It is one of the essential skills that make one an effective leader.
Each of these matters calls for critical thinking. When hiring an employee, HR personnel will go through his qualifications and prior work experience to consider if he is the best-suited candidate for the job. A face-to-face interview is likely to deliver some insights over the candidate’s proficiency levels for the role or profile.
When choosing a supplier, a company is likely to figure out suppliers’ track records, and go ahead with an alternative who delivers better quality of parts, materials, or goods in low turnaround time and at mitigating costs.
Similarly for marketing a brand one has a choice at choosing the best-suited marketing strategies from digital, OOH and DTH marketing, and product packaging. The selection of the strategies depends on an organization’s working domain and marketing budget. Defining the marketing budget is another business-critical decision.
Similarly, defining the direction in which a brand should progress is an exceedingly important business decision. Businesses take measurable risks over such matters, and not all ventures are very successful.
When Apple was planning to launch smartphones, they did not anticipate that the venture would be a grand success. Similarly, folding smartphones was considered the next big thing in the smartphone hemisphere, but are yet to be popularized over a large scale.
There are cases wherein a business owner may feel that if he finds a formula that makes his business ventures a success, he’d be happy. But unfortunately, such a formula does not exist. One has to think critically and come up with smart decisions for success in business.
Just like the challenges that one comes across in life or business are variable, the approach towards meeting the challenges also varies from one individual to the other.
But what is it that one should do to avoid making bad decisions? One should keep the process systematic while approaching challenges. It helps ensure that the decisions are not left to chance.
What are the types of decisions?
In the field of business management, decision making forms one of the core functions. It is a function that follows well-defined processes.
Let us take a look at some classifications of decisions:
- Strategic and routine decisions
Routine decisions are the day to day decisions that one makes at a workplace, and are the kind that does not require in-depth analysis or evaluation.
Strategic decisions, on the contrary, are frequently involved with a firm’s policies or strategic planning for the future. They call for careful analysis and evaluation.
- Programmed Decisions and Non-Programmed Decisions
Programmed decisions frequently involve repetitive functions. The decision making follows a standard procedure in this case. This could be something like granting leaves for employees or purchasing spare parts.
On the other hand, non-programmed decisions devise a resolution for unstructured problems, which seldom form a part of daily routines. Therefore, it may be difficult to come up with a standard resolution for resolving such problems. Just as an instance, opening a new branch for a company is a non-programmed decision.
- Policy Decisions and Operating Decisions
Policy decisions are tactical decisions that pertain to a firm’s policies and planning. Since they bear a long term impact over a firm, they call for careful analysis.
Operating decisions are frequently involved with the implementation of plans and policies. As an example, the announcement of an employees’ bonus is a policy decision, while calculations involved with the decision and its implementation are an operating decision.
- Organizational Decisions and Personal Decisions
Making an official decision on the company’s behalf is an organizational decision. Personal decisions are the kind that does not relate to the company in any way. Personal decisions can’t be delegated.
- Individual Decisions and Group Decisions
An individual decision may be taken in an official capacity but is always taken by an individual. Group decisions, on the contrary, are taken by an organization’s management and employees. Just as an example, if the board of directors comes up with a decision, it is a group decision.
What are the 7 steps of decision making?
In the corporate world, a manager’s decision-making abilities stand to bear repercussions over not just their success, but the success of their companies as well. Another important capability that a manager should possess is learning from the wrong decisions that he made in the past. This ensures that a manager’s decisions are never hasty and always profitable.
It is preferable if the business decision-making processes follow a process. This should be done following a close evaluation of alternatives.
An advantage that comes in with keeping the decision-making process-based is that the process can later be used for review if the decision making happens to go wrong. One will find it easier to figure out what went wrong.
7 steps towards decision making:
- Identify the decision
The first step is to identify the problem that calls for a resolution, or questions that need to be provided with answers. Similarly, the decision that you make should be clearly defined.
Working over a problem that is too broad calls for a careful evaluation. It should be done meticulously. Certain goals are easier to meet.
- Get the relevant information
Upon identifying the decision, one should gather the information relevant to the decision. This can be in the format of internal research. Figure out the areas where your organization has failed or succeeded in terms of the decision.
Alternatively, information may be derived from external sources as well. They may include paid consultants, market research, and studies.
However, it is preferable to derive only as much information that does not complicate the processes.
- Figure out the alternatives
Since you now have the relevant information with you, figure out the solutions to the problems that you had encountered. You are likely to have multiple alternatives before you for the resolution of the problem.
Just as an instance, if you are trying to gain a greater engagement over digital media, you’d have a choice at going for paid or free social media advertising implements, such as PPC advertising or Facebook engagement. You may choose to go ahead with a combination of both techniques.
- Examine the evidence
Upon identifying the different alternatives available at your disposal, figure out the evidence that weighs for or against your alternatives. You may also choose to undertake competitor analysis, and see what your competitors do to find success with their strategies. Figure out what will work for your organization. Recognize the pitfalls for all alternatives, and weigh them against the potential rewards that they bring.
- Choosing amongst the alternatives
This is part of the decision-making process where the decisions are made. For the same, one identifies the problem statement and the decision and gathers relevant information and considers potential paths. This puts one in the best position to choose.
- Implement the actions
When one makes a decision, one should implement it into practice. Plan accordingly to make sure that your decision stays achievable and tangible. Develop an action plan, and deploy your team for implementing the plans into action.
- Reviewing the decisions
Not immediately, but after some time following the implementation of a decision, you should conduct an honest and unbiased overview of your decisions. See if you were able to resolve the prevailing issues, answer the questions, or meet your goals.
Make notes, such that you are in a position to learn from the errors made.
Importance of decision making
For management, decision making is always an important function. It is required in all spheres of the organization.
At the managerial level, no functions can be performed without decision making. The positions are defined by the decisions they make.
- Managing continuous business operations
Organizational management needs to define the businesses they should undertake and why. They have to define the right ways to disburse and divide the finances among their projects. They also have to figure out the right channels to seek financial advice.
Similarly, when resources for any work are scarce, decisions need to be made. No business wants to end up in an indecisive position.
- Help determine objectives and achieve them
The reason why organizations operate is to achieve specific objectives and goals. Determining the objectives to be achieved is an important avenue for business-critical decision making. Future activities are all defined in line with these objectives. An organization’s objectives are widely accepted to be the backbone of an organization.
- Making the best use of the available resources
Meticulous use of human and physical resources depends on smart decision making. With proper decision making, the resources are assigned the best-suited projects for themselves. The work is more effective and the related costs stay at the lower levels.
- Executing managerial functions
Management functions are dependent on decision making. It forms a key component of all management actions, ranging from planning to the enforcement of the controls.
- Success at an institutional level
When meticulous decisions are made promptly, they provide higher outcomes at lower expenditures and drive an organization forward. Similarly, when the decisions are bad or delayed, they are unlikely to work in an organization’s favor.
- Technical complications
On-going changes in the technical sphere complement a business. In the present day dynamic business hemisphere, risks are more than they have ever been earlier. Decision making influences the life of a larger number of people and accounts for more capital expenditure.
- Solving problems
When resolving problems, we figure out the best-suited alternatives and implement them. This ensures that problems are resolved using good and effective decision making.
- Reduces the associated risks
Risks are commonplace in the dynamic business environment which currently prevails. For mitigating the risks, the decisions made should be made on a solid foundation. They should be based on rational thinking, a constructive approach, knowledge, and facts. This makes managers’ decisions more reliable and reduces business and non-business risks.
- Offset change and uncertainty
It is in a dynamic business environment that we currently thrive in. The decisions that we currently make may not be the best fit for the future as well.
Decision making is hence a persistent process subject to a range of factors. It brings about a change in the elements of planning and constituents, and helps and organization grow and develop.
Process of decision making
While making decisions, a manager should follow a series of steps that are systematically related. Let us take a look at these steps:
- A thorough investigation of the situation
The three aspects that define a detailed investigation are problem definition, identification of objectives, and diagnosis.
A manager should first and foremost clearly define the problem that calls for a resolution. Time and effort should be spent gathering only the information that is relevant to the problem. The problem should be defined in such a manner that the organizational objectives that it is blocking become clear.
Once the problem has been defined, one should accurately specify what makes an effective solution. Priorities should be defined at such a time. This will specify the problems that should be resolved immediately, and the ones that can be resolved over time.
At an organizational level, problems are frequently broken down into sections. A single solution is unlikely to deliver the best results for them all.
Upon figuring out a satisfactory resolution to the problem, a manager should define the course of action for the resolution of the problem. An in-depth understanding of the underlying causes of the problem should also be understood at this point, such that they can be worked upon.
- Create alternatives
When managers try and figure out alternatives, they see the problem with a unique perspective. This helps them center upon the trouble areas in a problem. A manager should make sure that only the alternatives that are viable and realistic are included in his list.
At this juncture, brainstorming plays a crucial role. It takes the format of a group approach. Several people who have a similar interest in mind sit down and work towards the resolution of the problem. The focus is on what needs to be done for the resolution of the problem. This helps come up with as many ideas as possible.
At such a time, the group leader should make a proactive attempt to keep the discussion moving. He should be interactive and should ask questions or make statements at all times. This keeps the session fruitful.
- Evaluate alternatives and go ahead with the most feasible one.
In the third step of decision making, all alternatives are closely evaluated. It is however difficult to be sure about the consequences of an alternative, so the uncertainty prevails to an extent. Henceforth, managers are required to make the best of their working knowledge, work experience, foresight, and scientific prowess.
- Implement and monitor decisions
Upon the selection of the best-suited alternative for the resolution of the problem, managers can create a plan for meeting the requirements. A few of the problems may be encountered while implementing the solution. Managers can work towards the resolution of the same as well.
This step includes the allocation of resources and setting up budgets and schedules. Progress can hence be measured in specific terms.
A procedure for creating progress reports is finalized. The team decides upon how they plan to communicate in case problems arise. Potential risks and problems that may arise on the way should also be kept in mind. Hence the decision may be re-examined closely by managers before implementation. They may come up with a plan for dealing with the uncertainties.
It is only then that the actual implementation takes place.
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Let us take a look at a few of the top techniques for decision making:
- Marginal Analysis
Marginal Analysis helps with defining that by how much will the output increase if one additional variable (machine, worker, or raw material) is added. The other factors stay constant in this case.
The prime utility of marginal analysis is for the evaluation of alternatives in the decision-making process.
- Financial analysis
Financial analysis is a decision-making tool. It estimates how profitable an investment is going to be. Furthermore, financial analysis is used to calculate the payback period and analyze cash inflows and cash outflows. By discounting cash inflows and cash outflows, the evaluation of investment alternatives is simplified.
- Break-even analysis
Through the break-even analysis, a decision-maker evaluates the available alternatives based upon the variable cost per unit, fixed cost, and price. Henceforth, the level of sales that necessarily cover all fixed costs becomes easy to determine.
The break-even point can henceforth be determined for any particular product or a company as a whole. At the break-even point, the revenue equals expenditure input, and the profit is null.
- Ratio Analysis
Ratio analysis is an accounting tool and is used to interpret accounting information. Using ratios, the relationship between the two variables is determined.
The basics among financial ratios are used for a comparison of cost and revenue for a predetermined period. With the interpretation of financial information through ratio analysis, the strengths and weaknesses of a firm become easy to determine. The current financial condition can be compared with a historic performance.
- Operations research techniques
Operation Research (OR) is deeply associated with the practical applications of qualitative methods for decision making. The decision-maker avails of mathematical, scientific, or logical means to arrive at realistic solutions to problems. Across decades, several OR techniques have been deployed by enterprises.
- Linear Programming
Linear programming is among the quantitative techniques used for decision making. An organization’s scarce or limited resources are allocated optimally for the achievement of a pre-defined objective.
Linear implies that the relationship amongst the variables is proportionate. The term programming is used because one develops a specific mathematical model for optimizing outputs in the event of the resources being scarce.
This technique is used when two or more activities compete for limited resources. All relationships in the scenario should be linear. Linear programming frequently finds applications for inventory management problems and product mix decisions. The technique helps with scheduling production facilities and maintenance activities.
- Waiting-line method
The waiting-line method is one of the operations research methods. It uses a mathematical technique that balances the services provided and the waiting lines. Waiting lines are also known as queuing. It is a situation which arises when the demand for service supersedes service facilities.
A perfect balance between demand and supply is difficult to achieve. In the event of excess demand, consumers wait for the services. But in the event of excess supply, there may be no customers for an organization to serve. The former scenario leads to customer frustration, while the company bears costs for unused service facilities in the latter. Striking the balance between demand and supply hence becomes important.
The Waiting-lines technique provides critical information for decision making but does not solve the problem as such.
- Game theory
Game theory is a sophisticated and systematic technique. Competitors are empowered to choose rational strategies that help them achieve their goals.
The technique delivers insights into situations that involve competition and delivers rational criteria for choosing a strategy. Minimizing the maximum loss and maximizing the minimum gain are two primary concepts used in game theory.