The decision-making process

ETHICS AND VALUES ARE VITAL TO FINANCIAL RETHINK

3.2 The decision-making process

Decision-making can be described as a process which is made up of successive phases which begin the moment it becomes known that there is a problem and lasts until the chosen solution is implemented. The four phases of the decision-making process are shown in Fig 3.2.

consultation deliberation participation

Figure 3.2 The four phases of the decision-making process

Information

Planning and execution Recognition

and diagnosis

Judgement and testing alternatives Developing

alternatives as possible solutions

Taking a decision (= making a choice from alternatives)

This model applies to all types of decision, though the content and the availability of information at each stage may vary. The order in which the decision-making process should take place is important if the organization is to make as effective a decision as possible.

Adequate attention should therefore be paid to the various phases of this process. It is not uncommon for participants in meetings where decisions are being made to be at different phases of the decision-making model. This often leads to confusion and certainly does not result in optimal decision making.

There are three golden rules for good decision making:

• Never skip a phase.

• Go through each phase in depth.

• In joint decision making, proceed from one phase to the next in groups.

This phase model of the decision-making process is also characterized by a ‘feedback’ element.

Indeed, the possibility that a manager will have to return from Phase 2 or 3 to Phase 1 cannot be ruled out if it is thought that in earlier phases the problem was not tackled correctly or completely. The Phase 1 analysis of the problem will have to be repeated before the manager can proceed. As such, decision making may be an iterative process – that is, a process which is repeated over and over again.

3.2.1 Phase 1: recognition and diagnosis

The first step should be to gain a clear impression of the problem that needs to be solved. The problem should be described in as much detail as possible and the individual issues which come together to make up the main problem identified. This can be done by, for example, asking questions, by studying a problem in depth in small work groups or by means of a joint discussion.

It is always tempting to suppose for the sake of convenience that the problem is clear to everybody involved. Starting off with an inaccurate definition of a problem only leads to far greater problems at a later stage. If a problem is not properly or completely identified, there is little chance that a good solution can be found in the further course of the decision-making process. On the contrary, a well-defined problem is already well on the way to being solved.

feedback

iterative process

main problem

… suppose that in a certain company the stock of finished products of a specific item has been seen to rise by a substantial margin. Management will spot this from weekly or monthly reports and needs to find out what is going on. Is this a temporary decrease in demand, or is it of a more structural nature? What is the cause? Too high a price? Too little direct advertising?

Before these questions can be answered, the problem has to be deﬁned clearly, since the various corrective measures which management has at its disposal – for example, a temporary price decrease, an improvement in services, the intensifying of direct advertising, doing nothing as the sales are expected to recover eventually, the dismissal of some representatives who are selling too little in the region – will depend on the nature of the problem.

For example …

Some investigation will therefore have to precede a decision. The following aspects must be kept in mind:

1 The root cause of the problem has to be determined. Symptoms have to be distinguished from causes.

2 It is important to reach mutual agreement regarding definition of the problem. This is not always easy. Sometimes this process is hindered because a manager has gone ‘company blind’ and as a result is not open to new developments. For example, he might still believe in the success of a product because he was the one who originally developed it.

3 There is often a tendency to keep seeing problems in terms of past experience. A new problem is handled in the same way as all past problems.

4 This phase, which is also called the identification phase, involves both recognition and diagnosis of the problem. Recognition of a problem is an admission that something is wrong and that something has to be done about it. Diagnosis is directed at describing the precise nature of the problem in practical terms.

At the end of this phase, it is important that the problem be described in such a way that in the next phases, solutions may be sought with relative ease.

The first phase of the decision-making process is of enormous importance for the successful completion of later phases. An incorrect or incomplete diagnosis can mean that later in the process there is no longer a clear image of what the problem actually is. This will involve a loss of time (as it will be necessary to return to Phase 1 for further investigations), or even the choice of inappropriate solutions. It is therefore crucial that all the involved parties are in agreement with regard to the formulation of the problem.

Mini case study 3.1

Managers do the daftest things … but how can they be stopped?

In the film ‘12 Angry Men’, released in 1957, Henry Fonda turns in a remarkable performance as a juror convinced of the innocence of a teenager accused of killing his own father. His 11 fellow jurors are equally convinced of the defendant’s guilt. Mr Fonda’s character battles to prevent the others from leaping to a hasty verdict – and wins them round, one by one.

Business needs more people like ‘juror number eight’.

Mr Fonda’s character has the courage to question the rationale for important decisions – even if that means swimming against the tide. Poor decisions in risk management and a host of other areas have helped plunge many of the world’s largest banks and other financial outfits into a seemingly bottomless abyss.

symptoms causes company blind

identification phase recognition diagnosis

CASE

Financial firms are not the only ones that have made mistakes. So, too, have business giants such as Yahoo!, which rejected a $40 billion takeover offer from Microsoft in February 2008, only to see its share price plunge. The woes of GM and Chrysler, which have been forced to grovel for government handouts, are evidence not just of the scale of the downturn but of the decisions in the upper echelons of the two American car giants.

All of this will come as no surprise to the authors of a new book called Think Again, which argues that even the cleverest business leaders slip up in crucial choices. Its authors – Sydney Finkelstein of the Tuck School of Business, and Jo Whitehead and Andrew Campbell of Ashridge Business School – point out that decision-making in business is often far from the rational, data-driven exercise that companies pretend it is. In fact, a decision is susceptible to a whole range of psychological biases that can trip up even experienced executives.

One of these biases is to assume that past experience is relevant today, even when the circumstances are different.

Another psychological bias is ‘pre-judgment’. This happens when managers let a strongly held belief blind them to arguments against it. Managers can make daft decisions for a host of other reasons too – including close friendships with colleagues and pure self-interest in hoped-for bonuses and other rewards. So how can companies try to stop these biases from causing calamities?

Messrs Finkelstein, Whitehead and Campbell suggest several safeguards. One is to seek out as much data from different sources as possible to ensure that managers weigh all sides of an argument. BP, a British oil giant, sometimes hires two law firms to get contrasting views on important decisions such as a potential acquisition.

Another safeguard is to encourage internal debate before a decision, perhaps by formally asking an individual or a team to play devil’s advocate. GE, an American conglomerate with a financial arm that has been battered by the credit crisis, recently announced that it would encourage more

‘naysayers’ to take part in its planning and operating meetings, in order to stimulate debate. A third safeguard is to monitor the progress of decisions so that errors can be spotted fast – though this does nothing to prevent a bad decision in the first place.

Even with such safeguards, an imperial chief executive surrounded by yes men might neuter the checks – perhaps by undermining devil’s advocates. So boards of directors need a further line of defence. Hence, using their own resources and outside consultants if necessary, they should conduct their own reviews of important decisions.

The book’s authors say that an independent chairman is essential if such oversight is to work. They warn that firms are asking for trouble if they have a single person as chairman and chief executive. Better to have a handful of angry executives than an army of angry shareholders.

Source: The Economist, March 24, 2009

3.2.2 Phase 2: developing alternatives as possible solutions

Only when the first phase of the decision-making process has produced as clear and as complete a definition of the problem as possible can potential solutions to the problem be considered. Solution possibilities or alternatives have to be developed. In this phase, the employees of the organization with the problem can, for example, be asked to offer as many solution proposals as possible – a process known as brainstorming. The problem may not be a new one and a previous solution can be suggested. However, decision makers are frequently confronted with new problems and new solutions will have to be developed, taking full advantage of the creative abilities of the organization.

A number of factors could stifle such creativity, however – for example, traditional ways of working or an authoritarian manager who always knows best. If creativity is to be encouraged, conditions must allow the free exchange of thoughts (see also Section 3.5). It is also

important that consideration not be restricted to only one possible solution – for example, one the boss has chosen earlier or one for which someone has a particular preference, conscious or otherwise. It is advisable at this stage to put all alternatives down on paper, to gather extra information to support these alternatives, and perhaps to examine these further in smaller work groups.

In Phase 2 – the development phase – a direct search should therefore be carried out for solutions to problems which were clearly defined in Phase 1. Phase 2 can consist of two discrete activities:

solution possibilities

creative abilities

development phase

1 The search for an existing solution. This can involve research into alternatives which have been used successfully in the past with a similar or related problem. An existing solution can be adjusted to suit the problem in question.

2 The development of a new solution. If there is no ready solution available, it will be necessary to develop a new solution.

These processes take time. This phase cannot be rushed as haste may lead to an inappropriate solution. In practice, new solutions seem to work well. Only one alternative will usually be tried out. However, it is advisable to at least have several alternatives at this phase, as this will enable the working party to weigh up the pros and cons of each alternative in the next phase of the process, and thus make the best possible choice.

3.2.3 Phase 3: judgement and testing of alternatives

Once alternative solutions to the problem have been suggested, it is then necessary to consider the consequences of each of the alternatives. This will form the basis of the eventual choice.

In contrast with Phase 2, at this stage a critical approach is what is required – playing ‘the devil’s advocate.’ The decision maker must check that the consequences have been mapped out as fully as possible, and that the analyses are all correct. When considering the consequences of the alternatives, it is important to map out the anticipated changes if a specific alternative is followed. Not only should the desired and possible consequences be taken into account, but also the undesired consequences of each possible solution.

In Phase 3, therefore, the decision maker considers which of the proposed alternatives will solve the problem best. A probable solution should be tried out on the basis not only of the available information but also on experience, feasibility and so on. It is important not to succumb to pressure from individual team members and omit testing. A proposal may sometimes not be critically tested because of pressure of time, bad management or because of power differences existing in a work group or committee. This may be related to inadequate explanations of the proposals or by the overwhelming pressure of work group members unwilling to consider anything other than their own proposals. Sometimes proposals are discounted unjustifiably because of a personal dislike of the employee putting forward the proposal.

Once again this selection phase can be divided into two separate activities:

1 Screening. This involves the comparison of alternative solutions resulting in the less satisfactory alternatives being rejected. This can often be carried out on the basis of relatively superficial criteria.

2 Judgement and selection. The remaining alternatives are subjected to even closer scrutiny and those with the best results are then selected as the preferred alternatives.

In this phase, it is important to create a good and open conversational climate and to call in specialists to look over proposals in order to judge the relative quality and effectiveness of each alternative.

3.2.4 Phase 4: making a decision

The final choice will depend upon whether the consequences of the solution shortlist have been measured against certain choice criteria.

One possible first criterion is the degree to which each of the alternatives results in the desired solution of the original problem, as specified in Phase 1. It is possible that two alternatives will lead to the same end result, be it in different ways. For example, a company wishing to enter a foreign market could either establish its own sales office in the area or could enter into an agreement with a foreign sales agent. In both cases the same end result can be expected. At this

critical approach

selection phase screening

judgement and selection

choice criteria

point, the decision maker must take into account other factors affecting his choice – for example, the relative costs, the time scales within which the goals must be reached, the risks involved or the resources the organization wants to commit.

The choice is made more difficult if more than one goal needs to be attained at the same time.

In such a situation, it is unlikely that all the alternatives will be realized to the same degree.

There has to be a list of priorities. For example, there could be two possible ways of addressing a problem: one in which efficiency is raised but at the expense of relatively low labor satisfaction; another possibility is increasing job satisfaction but at the likely expense of a decrease in productivity. Each of the alternatives will have its merits. Dilemmas can often be overcome by consultation with members of the organization with a view to finding a compromise.

Decision making usually takes place under less than perfect conditions. The decision maker will be unsure of many details and the data on which decisions are based may be incomplete or unclear. There may be a lack of information relating to future developments. Further information could be gathered with a view to limiting the degree of uncertainty, although this will involve extra time and expense and no guarantee of success. It may be that the decision cannot be postponed because otherwise a market-opportunity will be lost or an expected result not attained at all. All these factors must be taken into account at this stage.

Endless hesitation and prolonged investigation of the ‘ifs and buts’ should be avoided. The final choice is often made by a single person.

… when considering decision making in a business context, it is worth taking a look at decision-making theory as part of the discipline of psychology. The following examples from a research project provide some interesting insights.

When asked to choose between a certain profit of 800 Swiss francs or an 85 per cent chance of a profit of 1000 Swiss francs, most people chose the first option, in spite of the fact that the second option involved an expected profit of no less than 850 francs. The opposite happened when a loss was involved. Given a choice between a certain loss of 800 Swiss francs or an 85 per cent chance of a loss of 1000 Swiss francs, the second option was taken. In the first situation, there is an aversion to risk; in the latter case risk is welcomed.

Consider the following scenario. You buy a cinema ticket in advance for £5. You lose the ticket. Would you buy a new ticket? In the majority of cases, the answer is ‘no’. Now consider a slightly diﬀerent case. You arrive at the cinema to buy a ticket and discover that you have lost a £5 note. In such circumstances, almost everyone will go ahead and buy the ticket regardless.

For example …

Where alternative solutions have quite different consequences for those involved, procedures such as negotiations can be implemented. After a solution to the problem has been decided on, the next step is the authorization or formalization of the decision.

In this phase, good judgment, as clear as possible an image of the consequences of the solution alternatives, and a desire to reach an agreement or solution are all of importance if a justified decision is to be made. Careful comparisons, a review of the available information and a final check that all phases of the process of decision making have been completed all contribute to this.

3.2.5 Planning and implementing the decision

When all the steps in the process of decision making have been worked through and a solution has been chosen, an implementation plan has to be made.

At this point, responsibility for the implementation of the decision should be assigned.

list of priorities

decision making

extra time and expense

authorization formalization

implementation plan

Responsibility should not lie with just one individual. It is extremely important that there be commitment to the decision at all levels of the organization and that the decisions be

supported by those members of the organization who now have to live with the consequences of the decisions that have been made. In this respect, it is useful to examine the degree to which individual goals are consistent with the goals of the company as a whole. If these are in conflict, an employee may try to give his or her own goals priority by failing to implement aspects of the decision. Consideration of the willingness of the employees to accept the decision is therefore crucial to its successful enforcement.

Once the effects of the measures are known, a decision may be made to carry out a part of the decision-making procedure again in order to see whether the set goals are being attained.

There are sometimes advantages in repeating one of the preceding steps. However if a number of practical operational problems or undesired effects remain during the enforcement phase, it is wise to question the desirability of continuing along the chosen path. Perhaps there will need to be a change of direction after all.

3.2.6 The phase model of the decision-making process

As we have seen, the phase model covers the whole decision-making process from the initial signaling of the problem to the searching for alternative solutions and finally the actual choice of solution and ratification of a decision.

Each of the four phases – identification, development, selection and decision making (plus ratification) – involves a certain number of specific and structured activities.

The phase model of Fig 3.2 can now be extended to include all aspects of the decision-making process (see Fig 3.3).

Figure 3.3 The extended phase model of the decision-

making process (combining the models of Staerkle, Keuning–

Eppink and Mintzberg)

Phases

Information

• internal

• external

Recognition

Design

Screening

Evaluation selection

Planning and implementation Decision

making and authorization 1

Identification

4 Decision making 2

Development 3 Selection

Diagnosis

3.3 Factors inﬂuencing decision making

The phase model in Fig 3.3 depicts the process of decision making as a succession of discrete steps arranged in a logical order, and can therefore be used as a practical aid to structuring the process. However, the model does not take into account factors which can influence the course of such a process in practice. For example, the interests of the individual stakeholders will affect the decision-making process. Conflicts of interest may arise. In practice, progress in the decision-making process may be subject to complications or delays. Even with these

limitations, however, the phase model continues to fulfill the important function of

consideration

phase model

conflicts of interest

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