Decision+Making

= Section 3: Decision making in business = = = Decision Making A decision is making the choice between different options to achieve an aim or goal. We all make decisions every day about what to wear, what to eat, what music to listen to, etc. These are routine day-to-day decisions that we normally don’t have to spend a long time thinking about, and are normally easy to make. Other decisions are about where we want to be in the future, like what career we want. These decisions may take some time to make, and we don’t make them very often. It is the same in business. Managers have to make routine decisions that are easy to make, but can still be very important – for example, whether or not to order more stock today or next week. Next week will save us some money, but we may run out before then or lose sales. They also have to make decisions that affect the long-term prospects of the business – for example, should we develop a new product? We have to decide whether the cost of development will be too high, or should we risk losing customers by not developing a new product. Types of Decisions All decisions in business are important. Managers will decide on the aims and objectives of the organisation, they will organise resources to achieve these aims, and deal with the day-to-day problems that arise. They may have to change these decisions if there are changes in the business environment. When we look at these decisions we can identify 3 main types of decision: · Strategic · Tactical · Operational. Strategic decisions · These are the ‘long-term’ decisions about where the organisation wants to be in the future · Senior managers and the owners make these decisions for the whole organisation Managers and owners planning a long-term strategy for an organisation have to consider: · Where are we now? · Where do we want to be in 5, 10, 20 years time? · What resources will we need to achieve this? · What changes do we have to make in order to achieve our new goals? · How can we do better than the competition? Example Tesco’s decision to become the number one supermarket in the UK. They were number 2 to Sainsbury’s. They decided to increase the quality of their products to match Sainsbury’s, and to introduce new services (such as their financial services) which would make Tesco’s more attractive than Sainsbury’s to the consumer. Tactical Decisions · These are ‘medium term’ decisions made by senior managers. · They are based on how to achieve the goals or aims of the organisation as set out in the strategic decisions. · They detail how resources will be used to achieve these aims. Example Tesco opened more stores, recruited more staff to operate tills and help with bag packing. They sought new suppliers who could provide better quality at a price that would compete with Sainsbury’s. They opened 24 hours. This fitted in with their strategic decision to become the number one supermarket in the UK. For example, getting new suppliers was a way to increase the quality of their products. Operational decisions · These are the ‘day-to-day’ decisions. · They are more likely to be made by junior managers and supervisors. · They are made in response to minor problems that arise each day. Example In Tesco stores, staff are switching from shelf packing to bag packing when the shop is busy. Additional staff are brought in to cover for staff who are off ill. = Evaluation =

An important part of decision making is checking how your decision worked. Did things go as expected? If not then some changes may be needed. Decisions may have to be changed for any number of reasons. It is important that managers evaluate their decisions and make adjustments if necessary. Decision making process The first step in arriving at the correct decision is to identify exactly what you are trying to achieve. This is not always as straightforward as it sounds.
 * Decision making as a process **
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For example a business which found that its profits were falling decided that it should reduce its expenditure. It had a choice of reducing the amount spent on raw materials, labour or overheads. It decided to reduce the cost of labour by making some of its workers redundant. Rather than increase profits as expected it found that profits fell even further. It then carried out a full investigation and found that the reason for the fall in profits was due to the quality of workers it had recruited originally. Its competitors were offering better pay and so were getting the best workers. The reason for the fall in profits was the amount of wastage in production and low productivity due to the inexperience of its workers. What the business should have done was to increase pay to its workers to make sure it kept its experienced and skilled staff. They made exactly the wrong decision because they looked at the symptom of the problem (falling profits) rather than the real problem (low productivity). = Decision making model =

Making good decisions involves going through several stages. This is known as the decision making model. The stages of the model are: · Identify the real problem. · Identify a number of possible solutions. · Decide on the best solutions. · Communicate the decision. · Implement the decision. · And, finally, make sure the decision is working as expected. The role of managers Managers are the people who take responsibility for running the business. For example, senior managers in Tesco make strategic decisions. Managers of individual stores make operational decisions on moving staff from one task to another. The type of decision that managers make will depend on factors such as how high up they are in the organisation and the situations that they have to deal with. Managers have to make the business decisions, but they also have to make sure that the decisions they make work for the business. To do this they have to: · make sure that everyone that needs to know about a decision is told · make sure thay everyone understands what they have to do  ·  give the workers the resources they need · make sure they do it, and that they do it properly. Managers must ensure that all the staff they are responsible for are aware of the decisions that are made, and how they will affect them. Managers cannot watch over all staff all of the time, nor do they have time to check every piece of work each worker does. To help managers make sure that their decisions work they: They give subordinates the authority to carry out tasks. This helps with motivation and reduces the manager’s workload. They get workers to work harder. This can be done by telling workers to work harder. However, this may not be successful and it may be better for managers to encourage them by helping them enjoy their tasks through team-working, participation in decision making, and by giving them some responsibilities. Once the real problem or objective has been identified, managers then have to come up with a number of possible solutions. When producing possible solutions they have to take into account a number of factors. The need to fit in with organisational objectives When considering possible solutions the manager should take into account the strategic objectives of the organisation. For example, a factory manager cannot increase profits by using cheaper materials if producing high quality goods is one of the stated aims of the senior management or owner of the business. Profit will not increase unless those cheaper goods are just as good or better than the materials used before. The decision must fit within the mission statement or the set aims and objectives of the organisation. Other objectives of the organisation may be: · profit maximisation · survival · growth · social responsibility · provision of a quality service. Tesco’s objective was to be the number one supermarket in the UK. Managers made a number of tactical decisions to fit in with this objective, e.g. getting new suppliers. The stakeholders of the organisation As we have previously seen stakeholders are those who are affected by the actions of an organisation. Any decisions made may well affect the stakeholders as well. The stakeholders are: · shareholders/Owners · employees · customers · suppliers · banks/Lenders · community · government. // Shareholders // They will be very interested in any decision that affects the dividends they receive as their share of profits. Any decision that will reduce profits, even for a short while, will not be popular with the shareholders. If shareholders are unhappy with the decisions made, they can voice their concerns at the Annual General Meeting, and even take a vote to replace members of the Board of Directors or the Chief Executive. This is something that the managers of the business would want to avoid, so they would have to consider how the shareholders will feel about decisions made. // Employees // Employees who work for the business will be very interested in any decisions which affect their pay and conditions, and their job security. Any decision that reduces pay, erodes terms conditions or threaten jobs will worry employees. If they are unhappy they will be less motivated and so produce less, so it is important that employees are aware of why the decisions are being made and exactly how they will affect them. If the employees are still not happy or see better alternatives, there are a number of things they can do. If they are members of a trade union or an employee association they may be able to influence what happens in the organisation through negotiation. If this fails they can take some form of industrial action to try to prevent the decisions being implemented. They can work to rule, work much slower, refuse to work overtime, or go on strike. // Customers // Customers will be concerned if the decisions made affect the price, quality, or service of the product – they may change their buying habits if the product does not meet their requirements. // Suppliers // Suppliers will want to get regular orders with prompt payment – these may be affected by decisions made by the business. For example, if there is a decision to increase production then more materials will be ordered from the supplier. The suppliers may then have to vary the period of credit and/or the level of discount offered to the firm. If the supplier finds it difficult to provide the extra materials, then the decision may have to be changed. =// Banks/Lenders //= If a firm has borrowed money, then banks or lenders will have a financial stake in the success of the business. Banks will want to ensure that any decisions made will not affect the firm’s ability to meet its loan and interest repayments on time. // Community // The community could be affected in a number of ways by the decisions made in the business. For example, if the business decides to expand, this could lead to more traffic congestion on the local roads and more pollution, or could mean the destruction of the local beauty spot, affecting local wildlife. The local community could be worried by such a development. They could form a local pressure group which would campaign against the expansion, or they could involve a large organisation like ‘Friends of the Earth’ to campaign for them. The local council would come under pressure to stop the expansion going ahead. It is important that the concerns of the community are taken into account when making decisions which will affect them, particularly when one of the objectives of the business maybe social responsibility. // Government // The government passes legislation which affects businesses, and so this will have to be taken into account when decisions are made. For example, the government recently increased the cost of road transportation through increases in the cost of road tax and fuel for lorries. Obviously in terms of keeping costs down, the less distance the product has to travel by road to its markets the better, so the business may decide to move its factory nearer to its main customers. If the government decides to reduce the rate of income tax, consumers would have more money to spend and this could mean greater demand for the business’s products. The business will then have to decide if they want to expand, so that it can satisfy the consumers’ new demands. It is also important for the business that any decisions it takes are legal, otherwise they could be prosecuted. The government can introduce legislation at any time to prevent what they see as undesirable actions by businesses, e.g. a firm gaining a monopoly position in a particular industry. Therefore it is important that businesses take into account what the government will approve or disapprove of when making decisions. Deciding on the best alternative The decision on which option to choose will depend on which of the possible alternative solutions best meets the objectives of the organization. Once decided, managers should communicate the decision and arrange for any resources that need to be put in place. They then have to check to make sure the solution is working as expected, and if not, find out why not. Summary There are three basic types of decision: · Strategic decisions · Tactical decisions · Operational decisions. Strategic decisions are concerned with setting the long-term aims and objectives of the organisation. They do not go into detail about how these aims and objectives should be achieved. Tactical decisions are concerned with how the strategic decisions are going to be achieved. They are more short-term decisions and will go into detail about how resources are to be used to achieve the aims and objectives of the organisation. Operational decisions are day-to-day decisions, dealing with the problems that arise in the daily running of the business. All decisions are subject to change in the political, economic, social, technological, environmental and competitive environment that the business operates in. The decision making process involves: · identifying the real problem · identifying a number of possible solutions · deciding on the best solution · communicating the decision · implementing the decisions · and finally making sure the solution is working as expected. Managers are responsible for the decision making process, and have to take account of how stakeholders will react to decisions made. Stakeholders influence how the business performs, and will therefore influence the decisions that are made. making the choice between different options to achieve an aim or goal. || decisions which set out the aims of the organisation. || decisions which state how these aims will be achieved. || routine day-to-day decisions dealt with by an organisation. || giving staff the authority to make operational decisions in order to carry out tasks. || encouraging employees to enjoy their work and to feel part of the organisation. || the aims which the organisation sets out to achieve. || those who are affected by or have influence over the actions of an organisation. || the owners of an organization. They each own **shares** in the business. || the yearly meeting of shareholders at which the Chairman and Board of Directors report on how the business has done during the year. || 
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