DECISION-MAKING IN BUSINESS

1.0 INTRODUCTION

In business, there are absolutely no right or wrong decisions but intelligent choices. What one considers a right decision in a particular time frame may turn out to be an unintelligent decision if the circumstances change. This is particularly true in developing countries where most of the variables required for intelligent decision are lacking. In some industries, the total production is unknown, the consumption pattern is not clear, the total population is a guess work, supply of raw materials is influenced by political consideration and the lead time for the supply of raw material is most unpredictable.

An entrepreneur may decide to import large quantities of raw material because it is under license. The restriction can be lifted within a month after the importation, purely on political grounds without giving consideration to its consequences on the successful operation of the businessmen in the industry.

Decision-making is one of the most crucial activities of management. The necessity to decide is the everyday preoccupation of management in all types of organisations, whether small enterprises or multi-national corporations. The decisions that management has to take are sometimes simple and in other instances, complex and overwhelming. A decision to increase production in a particular industry can necessitate the employment of more labour, increase in plant capacity, acquisition of more equipment, borrowing of money and the mastering of new technological know-how.
This decision can affect the entire economic climate, resulting in full employment, with its attendant consequences – increase in money in circulation and inflation. In this unit, you will be introduced to decision-making and all that it entails.

table of content B

2.0 OBJECTIVES

At the end of this unit, you should be able to:

define decision-making
identify the process involved in decision-making
classify decisions
highlight the stages in decision-making
describe group decision-making
discuss creative thinking and steps involved in creative thinking.

3.0 MAIN CONTENT

3.1 Decision-Making Process

Definition

A decision is the selection of alternative course of action from available alternatives in order to achieve a given objective. The decision process is influenced by the unique environment of the decision maker, his organisational position, available knowledge and experience in decision-making. A decision is a choice aimed at achieving optimum result in a given situation.

Decisions are made when a person finds himself in a situation where he must act and he is not quite sure of the choice that will give the best result. A decision can be seen as a mental process that forces us to analyse the situation in order to master it, or increase our knowledge of the area in which decision is to be made. An intelligent decision is one which yields the best intelligent response to a situation. Decisions aim at making things happen – in order to achieve an objective. Absence of
a decision is a decision. A decision not to act or to postpone a major decision is a decision.

3.3 Classification of Decision

Decision-making can be classified into three major groups:

Decision-making under certainty
Decision-making under risk
Decision-making under uncertainty.

(a) Decision-making under certainty

Certainty – it is assumed that there is a single-spaced, complete and accurate knowledge of the consequence of each event.

A decision made with full knowledge of the occurrence of an event is said to be decision under certainty. In this situation, the decision maker knows what the stated value of the pay-off is expected to be. If, for instance, the value is N1.00, in making the decision one has to select the alternative that gives the expected pay-off of N1.00. Assuming that a service organisation wishes to determine the cheapest way of handling its security services and finds out that:

if it subcontracts security service, it would cost N7,000 per annum
If it handles its own security by hiring 4 security-men, it would cost N10,000 per annum
if it installs burglary proof and other security measures it would cost N12,000 per annum. In this situation, it is easy to select plan (a), since it entails the lowest cost.
Decision-making under risk Uncertainty – the consequence of each choice cannot be defined by a correspondence relationship even within a probabilistic framework.
Decision-making under uncertainty

Risk – it is assumed that accurate knowledge about the probability distribution of the consequence of each alternative exists.

3.4 Stages in Decision-Making

Every decision-making process has some basic elements in order to be effective. They include:

the formulation of goal or goals
mental process to acquire knowledge on the situation
analysis to determine alternative course of action
choice procedure

(a) Formulation of goals

For one to make a decision, one must have goals that one expects to achieve. The goals to be achieved may be determined by the organisation and could aim at minimising cost or maximising profit. In the case of the production manager, the decision at that level could be to reduce rejects by 20 percent or increase average output by 10 percent.

(b) Acquire knowledge

A rational decision requires the decision maker to acquire a thorough understanding of the problem in order to make an intelligent choice. This demands that the decision maker saturates himself with facts about the situation. At this stage he seeks information from employees who have expert knowledge about the situation understudy. When vital decisions are to be made, “brainstorming” is encouraged in order to avoid costly, hasty decisions. It is advisable to hear both from those who are interested in the problem and those who are opposed to it. The step is likened to a situation where a “car won’t start” in the morning. Why? What is the cause of the problem?

(c) Analysis to determine alternatives

The essence of analysis at this stage is to determine possible courses of action – the search for alternatives. The number of alternative ways of solving the problem that could be thought out depends on the effort expended by the decision maker in the search for alternatives. This is one of the crucial steps in rational decision-making. It involves the utilisation of the vital information gathered through the process of defining the problem. The decision maker can gain insight from experts
and engage in creative logical reasoning. This will help to achieve the objective with cost effectiveness in mind.

(d) Decision

Decision is the selection of the course of action believed by the decision maker to yield the best result under the circumstances. The final selection is influenced by the decision maker’s past experience, his value judgement, and the logical process that has been established and followed in the previous steps (a) – (c) above.

It has to be pointed out that the selected solution may not necessarily be the most satisfactory solution, but the most intelligent decision under the circumstance. This has often been called satisficing. An entrepreneur may decide - in the circumstance, to select the alternative that “minimises his risk or involves “minimum regret” or gives him optimum result in the short-run. There is a tendency for Nigerian entrepreneurs to seek short-run instead of long-run growth.

3.5 Group Decision-Making

An organisation is not better than the people that make it up. The success or failure of an organisation depends on the creativity of its human resources. Efficient and effective utilisation of these people to

make use of their intellectual abilities, in part, helps the growth of the organisation. There is a popular saying that “two heads are better than one, even if they are ‘coconut’ heads”. This illustrates the importance of participative decision-making.
One of the major problems encountered in retaining young university graduates in many indigenous enterprises is the absence of participative decision-making. The entrepreneur is reluctant to involve the young graduates in areas they believe they can contribute their best in the organisation; whereas, employees like to be involved in decisions that affect the organisation, especially those that affect them directly.

Decisions are expected to be made in a social environment. It is a situation in which each participant contributes his ideas towards the realisation of a predetermined goal. No idea is useless, no matter how stupid it sounds. In many instances, what some people call “stupid” or “crazy” ideas are those that disagree with their own. There is a popular saying that “where the people always agree, only one person is doing the thinking”. Group decision calls for varied views - some optimistic and some pessimistic.

In the final analysis, what determines whether a decision is to be made by an individual or group is the type of decision to be made, and the importance of the decision to the immediate attainment of organisational objectives.

3.5.1 Committee Decision

In modern organisations, committees are increasingly being used as effective administrative tools. In large and small organisations, committees are used for a variety of reasons. In large decentralised organisations, a committee is the device for achieving coordination of activities and sharing information among the various departments and divisions of a company.
A committee can be seen as a group of people assembled together to take action on an administrative task. In some organisations, there are committees for each key functional area such as finance, production, sales, audit, purchasing, and engineering. These are generally permanent committees. These committees often meet, regularly, once or twice a month to discuss general problems affecting their operation. There are instances where committees are appointed to study and offer solution to a specified organisational problem. They stop functioning as soon as the assignment is completed. This is generally called an ad hoc committee.

Committees such as salary adjustment committee, tenders board committee, employee grievance committee or question box committee can be ad hoc committees. They can also be permanent committees. The government makes use of some committees in dealing with specific assignments. In Imo State, the government appointed the University Planning Committee to help plan the state university; at a point too, the federal government appointed the Revenue Allocation Committee. These are ad hoc committees which fail to exist as soon as their functions are completed.

3.5.2 Selection of Committee Members

The effective use of committees to proffer solutions to organisational problems depends on the selection of the right people to serve in the committee. Most of the criticisms often voiced in the use of committees as an effective device in decision-making bother on the quality of people appointed to serve on them. Committees are often seen as “a group of people who keep minutes and waste time and money”. Hudson, writing on this important issue, observes that:

Equally sad and costly are the “good” people who are un- trained to the rigours of sound committee working – the people who debate on ideas, who lack a gift for negotiation, the people who are spineless, irrational, hyper-sensitive and over emotional people who are blindly devoted to an ideology, blindly loyal, or blindly combative.

The selection of members of a committee should be based on qualifications such as knowledge of the subject matter to be assigned to the committee, interests, responsibility, availability and emotional maturity.

The number of people to serve in a committee is to be determined by the nature of the assignment. A large number is sometimes very cumbersome to manage and makes it often difficult to agree on a specific time and date for meetings.

3.5.3 Committee Chairman

The success or failure of a committee, in most instances, depends on the chairman. The chairman is expected to be a mature, intelligent, skillful, versatile person who is capable of accommodating varied opinions. A committee succeeds when the members believe that the chairman is equal to the task and is capable of leading the committee to arrive at mature conclusions. A capable chairman is in a position to help reduce some of the major disadvantages associated with committees such as cost, idle debates, danger of compromise and slow action.

3.5.4 Benefits and Limitations of Committees

Almost all formal organisations have committees because it has been very useful as one of the basic democratic ways of operation and the realisation that the concentration of tasks in one individual does not make for efficient and effective control. The following are the basic advantages.

It makes different viewpoints available-The interaction between members brings out different viewpoints that could not have been considered or given due weight if the decision was made by one person. Collective views make for thorough and complete analysis. Thus, it provides a forum whereby knowledge, experience and abilities of several experts are brought together.
Better coordination- Committee decision helps to promote better coordination in the company. In any type of organisation, there is often constant need for coordination in order for everyone to pull in the same direction. The coordination of sales department with production, purchases and advertising departments brought about by their being in the same committee will help to achieve optimum results.
Committee as advisers- A committee can be advisory in nature. This type of committee is created to advise, counsel and make recommendations to the managing director to help him make an intelligent decision. An administrative commission of inquiry is a typical example of an advisory committee.
Collective responsibility for decision- When the chairman of the committee takes a decision, it becomes a collective decision of the committee, irrespective of whether a member likes it or not. The decision becomes the decision of the “group” which they cannot afford to disagree with. In some instances, there is an “overtone” which suggests to members that he would like them to “go along”. What he really demands from them is support.
Lack of accountability - One of the major disadvantages of a committee decision is that many committees only recommend or advise. To advise is not to decide, as the decision lies with the chief executive who is accountable for the outcome of the decision. In a committee decision, no one is held accountable or responsible for the decision because of the nature of the impersonality that characterises all committees. It has to be observed here that depending on the nature and authority, a committee may serve in a service, advisory, coordinating information or final decision-making capacity.

3.5.5 Use of Committees in Nigerian Organisations

Committees, standing and ad hoc, are extensively used in Nigerian organisations. All organisations with more than 50 employees have one form of committee or the other. In a study of Nigerian establishments, 78 percent of the organisations reported the existence of one committee or the other - with varying degrees of authority and life span. Interestingly, 58 percent of the respondents in industry, commerce and service organisations advocated the use of more committees while 28 percent of the respondents in the public service advocated the use of more committees. Some managers, 68 percent, serve in more than four committees at a time. Only 2 percent serve in only one committee

3.6 Creativity in Decision-Making

A good committee can be very creative. A creative committee is one that comes up with new ideas, new approaches, and new ways of doing old things, doing a common thing in an uncommon way, a new product, or new application or a combination of existing knowledge. Creativity is one of the highly sought after talents in management. A creative manager seeks original solutions to existing problems. Creative thinking is necessary in business, for the organisation is constantly in search of imaginative solution to problems posed by its competitors and the total environment. Many organisations have in their midst individual great inventiveness, and the unusual ability to create new ideas is the realisation that some people are more creative than others; this is why committees are often used in the solution of some of organisational problems.
An ideal environment that is supportive of and promoting creative thinking is necessary for individuals to challenge that imagination. The recruitment of people who are creative is a necessary precondition to encouraging creativity in an organisation.

3.7 Steps in Creative Thinking

Studies have shown that certain steps are necessary in creative thinking. These can be summarised as follows:

Problem identification
Investigation
Incubation
Illumination
Verification.

1. Problem identification

The first step in creative thinking is the perception that a problem exists. This can be in production, sales, customer relations or advertising. The discovery of this problem launches the creative individual immediately to seek for suitable solution. No creative work has been achieved without dissatisfaction with the existing situation which forces the “genius” to seek new ways.

2. Investigation

Investigation is the second step in creative thinking. Here, the individual examines the problem and analyses old ways of performing the task. This can call for intensive research into existing knowledge on the subject. There could be an exploration into all the possible avenues that will lead to the discovery of such things as the interrelationships, and associations. This step involves the accumulation of facts and figures that bear on the subject. A thorough examination which helps the individual to saturate himself with facts and figures on the problem will help to develop a creative solution.

3. Incubation

This is a very important stage in the process. Here, the entire mind reflects on the problem. Sometimes, a creative solution is not easily available and the individual leaves the subject for more reflection. Creative thinking is not a choice of alternatives as in decision-making. It is a process of mulling the problem over. It may involve the use of the unconscious mind. The creative person is, at this time, in a special state of mental “stress”, and detaches himself from things around him. He could go around the circles with a real solution arising and he can at this stage leave the problems for a while to avoid mental fatigue. This period is characterised by frustration and helplessness. This is often referred to as the gestation period. Rest is recommended. The rest period would refresh the mind.

4. Illumination

An ideal brainstorming session highlights the importance of new ideas. The rules for successful brainstorming session include the following:

Criticism of ideas must be withheld until after the session.
The group must welcome diverse suggestions and encourage the wildest of ideas.
Developing a greater quality of ideas increases the likelihood of having one really useful idea.
Each member of the group should improve and relate his own ideas to the ideas of others.

5. Verification

Some of the major criticisms of brainstorming are that it is time consuming. Many man-hours are spent in generating ideas and also in crystallising them. It also produces many superficial ideas.

Nevertheless, its usefulness in creative thinking can hardly be overstated. In many organisations, it is indispensable in determining the name of a new product and determining a new advertising slogan. Political parties in Nigeria use it very extensively.

3.8 Qualitative Methods of Decision-making

The use of qualitative methods as aid in the decision-making is well recognised in large organisations in developing countries, and to a less extent, in small industries. One of the major reasons for this is the limited education of the owners of small businesses. With increased education and the separation of owner-manager, these techniques will be increasingly found useful by small businessmen.

3.8.1 Operations Research (OR)

The mathematical techniques used as aid to decision-making are often called operations research. Churchman et al., define operations research as:

An application of the scientific method to problems arising in the separation of a system which may be presented by means of a mathematical model and in solving of these problems by resolving the equation representing the system.
Operations research has gained wide acceptance because of its use in modern high speed electronic computers. Basically, operations research is the application of scientific method in the solution to business problems; OR is applied in a variety of business problems which include the following:

Productive scheduling
New product development
Long-range planning
Warehouse location selection
Retail outlet selection
Product mix selection
Air and highway traffic control
Portfolio management.

The use of OR entails the building of models called equations to represent the system.

3.8.2 Linear Programming (LP)

Linear programming is a relatively new mathematical technique in situations requiring the optimum allocation of resources, money, capital equipment, raw material and personnel. It is useful in production management because allocation problem pose great complexity involving a large number of variables can equally be solved through linear programming techniques. If the Nigerian Bottling Company wishes to determine the best cost method of distributing its products from its four bottling plants to a number of warehouses located all over Nigeria, linear programming technique can be used.

3.8.3 Queuing Theory

Queuing theory is often called waiting-line theory. The system is used in determining the optimal utilisation of a facility in an intermittent service.

4.0 CONCLUSION

In this unit, you have learnt that decision-making is one of the most crucial activities of management. It has also been emphasised that there is the need to make decisions in all types of organisations, whether small enterprises or multi-national corporations. The decisions that management take are sometimes simple and in other instances, complex and overwhelming.