Introduction to Decision Making

Bringing back Steve Jobs to be CEO of Apple in 1997 is regarded as one of the greatest business decisions of all time. He had been forced out of the company he founded by its board of directors in 1985 after a power struggle with its CEO. Experiencing losses and stagnating market share, Apple looked to Jobs to turn the company around. His commitment to innovation in technology and design led to breakthrough products including the iPod and iPhone, which helped make Apple one of the most valuable companies on Earth.

Conversely, one of the worst business decisions ever was the merger between AOL and Time Warner in 2001. The combination of a then-leading Internet company with a global media enterprise was predicted to create synergies around content and advertising as well as significant cost savings and thus to create great returns for shareholders. The opposite happened as the combination failed to achieve any of the anticipated benefits. Time Warner spun-off AOL in 2009, putting a sad end to a decision that destroyed more than $220 billion in shareholder value.

Of course, people don’t set out to make poor decisions. Sometimes circumstances beyond their control or unforeseen events derail choices made based on the best available information at the time. But there are many factors surrounding decisions that leaders and managers do control. Attention to how decisions are made has a lot to do with whether they select the best alternative with the greatest likelihood of success.

Decision making is at the heart of what managers and leaders do. Management scholar Henry Mintzberg describes a manager’s role as decider as involving the use of information to achieve desired aims (19). Whether it involves allocating resources, negotiating deals, or solving problems, their choices influence the direction of organizations, determine how they operate, and shape the work lives of employees.

What is Decision Making?

Decision making is the process of choosing between alternatives to achieve a desired outcome. It is cognitive, meaning it involves thinking, reasoning, and perception. It is also psychological in that it can be influenced by emotion, motivation, preferences, and bias. Decisions are also influenced by aspects of the situation; for example, some decisions are made under extreme time pressure or involve high degrees of uncertainty due to the lack of available information.

Decision making implies that some action will be taken as a result of the choice made. People sometimes wait for decisions to be made by others before they act. Decisions must be implemented to have their desired effect. Planning and decision making are linked since implementation requires identifying what needs to be accomplished, when it will be done, and who will do it.

Decision making involves understanding the substance of the alternatives, including the factors they encompass, such as resources and people, and their costs and benefits. For example, let’s say you are a small business owner who has decided to relocate your retail store to a new location. To reach this objective, a number of decisions must be made: Where should the new location be? How will you physically move your merchandise from one place to the other? How will you let your customers know where to find you? Each decision involves a different aspect of the relocation and must be considered on its own as a discrete choice.

The process of decision making is separate from its substantive focus; that is, how you make a decision can be independent of what the decision entails. A decision may be made by a single individual or by a group. It can involve extensive data collection and analysis or it can be made more instinctively without much deliberate effort. Organizations typically have formal decision processes that specify who is responsible for making the decision and who is held accountable for its results. As individuals, we often make decisions without being aware that we are following a process; but each of us has developed a way of gathering information and considering alternatives even if it only involves something as simple as making a list of pros and cons.

Categories of Decisions

Everything that happens in an organization is the result of a decision being made by someone. Each decision, big and small, contributes in some way to the bottom line. The amount of responsibility and autonomy to make decisions typically varies by level of authority. Some managers make many decisions a day that have a wide impact, while many employees make few decisions that have an effect beyond their own tasks. Decisions made in organizations can be divided into three categories: strategic, tactical, and operational.

Strategic decisions are those related to the organization’s reason for being. They determine the direction of the enterprise and how it will achieve its goals. This type of decision represents long term commitments of resources and is not readily changed. Strategic decisions are made by senior executives and boards of directors. Examples include choosing which markets to compete in, what products or services to offer, and what the capital structure should be.

Tactical decisions are those that have an impact in the medium term and are associated with how strategic decisions will be implemented. These are decisions that mid-level managers make. Examples include choosing the technology that will be used to manufacture a product and selecting channels of distribution. There is more flexibility around tactical decisions than strategic ones; adjustments can be more easily made when results are poor since tactical decisions represent a less permanent type of investment that doesn’t necessarily preclude making another choice.

Operational decisions are day-to-day choices made by line managers and employees that directly support the production and delivery of goods and services. Every business function has processes that require decisions to be made. Human resources departments make hiring decisions; a pharmaceutical research and development lab chooses what experiments to perform; a fast-food restaurant manager decides who to schedule for which shift. Operational decisions such as these determine how tasks are performed and who performs them and when.

Evaluating Decisions

We can think of decision making in terms of efficiency and effectiveness. These are characteristics by which we judge the quality of a decision. Efficiency considers how many resources are used in making the decision (for example, how many people are involved) and how long it takes to reach the decision. Efficiency takes into account inputs and outputs; more consequential or impactful decisions may require more time and resources, while it may be wasteful to put the same amount of effort into making a much smaller decision.

The effectiveness of a decision making process describes how likely it is to result in the desired outcome. It is determined by several factors. One key component is the quality and reliability of the information used to identify alternatives and weight their advantages and disadvantages. Another is how explicit and precisely specified are the criteria by which the choice will be made. The rigor and logic with which the alternatives are identified and assessed and the ultimate choice made also contribute to decision effectiveness.

The ultimate success of a decision often depends on how well it is implemented. Efficiency and effectiveness do not always go together. An efficient decision making process may nonetheless lead to an inappropriate or wrong decision. It is possible to reach a decision through an effective and efficient process but implement it poorly so it does not achieve its objectives. On the other hand, a decision reached through a lower quality process can be made a success through careful attention and diligent effort to translate it into action.

References:

Lashinsky, A. (2012, October 1). The Greatest Business Decisions of All Time. Fortune. Retrieved from http://fortune.com/2012/10/01/the-greatest-business-decisions-of-all-time/.

Davidoff, S. M. (2009, April 29). A Slow Demise for a Deal from Hell. New York Times. Retrieved from http://dealbook.nytimes.com//2009/04/29/spins-splits-and-time-warners-deal-from-hell/.

Mintzberg, J. (1989). Mintzberg on Management. New York: Free Press.

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