Decision Making in Management
Management is the core of any organization and the only thing a company’s competitors are not able to copy or steal, great management is what differentiates great companies from good companies. An organization can be imagined as a car and the people managing – the driver, without whom the car would crash, in order to prevent the car from crashing the driver has to make the correct decisions to keep it going in the right direction, get it to the predetermined destination – the correct decisions have to be made by the board of a firm, as a means for the organization to efficiently achieve its goals and objectives.
There are many steps to making decisions in management. There are two main decision making ways for management, the classical decision-making method, also known as the rational decision-making method, and the administrative decision-making method, the former is only used, if the managers making the decision are logical and rational, unfortunately, this is rarely the case, as it is more likely for an individual to act irrationally, due to personal bias regarding a specific situation., thus the latter method of management process of deciding is used more frequently (Back, 1961). A great example that illustrates the fact that not all decisions made by authority are correct and result in an increase of the performance of a firm is a study conducted by Bain & Company that analyzed fifty-seven reorganization cases - one of the first things that most new CEO’s do - between 2000 and 2006 and found that less than one third of reorganization cases in question had a positive effect on the performance of the establishment (Marcia W. Blenko, 2010).
Firstly, whichever of the aforementioned procedures of decision making is used, the administration of a said firm must be able to distinguish that there is an outstanding problem and that an actual decision needs be made to resolve it. For this to happen, the management has to be fully familiar with how the firm is positioned in the market, as well as the inner workings of the legal entity in question. The managers have to be interested in the matter and motivated to make decisions not only beneficial to themselves, for example, raising the salaries of the board members, but also decisions that are beneficial for the firm – decisions that promote future growth. In order to make successful and reasonable decisions, managers best are open-minded, unbiased and open to suggestions (Nutt, 1999).
The next step of making an executive decision depends on which of the techniques of deciding on what to do next is being used. In the case of the classical method being used, management has to conduct a thorough analysis of every possible alternative and determine, whether the alternative is feasible, satisfactory and whether the alternative’s consequences are affordable, only after an alternative meets all of the criteria, should it be considered as a solution to an outstanding problem (Salvat, 2016). If the more common administrative model of decision making is used, the decision makers often have a limited amount of time, in for analyzing a limited amount of alternatives, from which they most often choose the first one that meets the minimum and a rather narrow array of criteria, while being conscious of the fact that better alternatives might exist. This principle is called satisficing and is popular in high-pressuree environments (Bugajenko, 2017). Because of the presence of uncertainty in the decisions made with the administrative method, the managers have to be as confident about their decision as possible. Theory about decision making states that there is a negative relationship between the level of certainty about of a decision and the level of risk regarding the consequences of the decision, meaning that the higher is the uncertainty the higher are the chances of making a bad decision – a decision that is either going to have no or a negative effect on the organization.
The board of a company has the power to influence the performance of the company
through the decisions, they make regarding the structure, the products and the policies of the organization., the results of which are reflected in the performance of a company. The decisions an organization’s board makes are even more crucial for public companies, as their valuation depends on the stock market, which in turn reacts to either good or bad news rapidly (Harrison & Pelletier, 2000). For example, a management decision to release a new, unique product can have a substantial effect on the price of the company’s stock, such a phenomenon can be observed by analyzing the stock price of Apple Inc. prior and after the announcement of the iPhone in 2007. The day Steve Jobs announced the iPhone, Apple Inc. stock rose over 7%, while the stock price of their new competitor BlackBerry fell over 6%. By announcing their now flagship product, Apple succeeded in reducing the market cap of BlackBerry by $2 billion (Arrington, 2007). Another vivid precedent for authority decisions affecting the performance of a company is Burberry, whose profits, as of 9th of November decreased by 34%, due to costs of the restructuring of the company took their toll on the earnings (Megaw, 2016). In hindsight, the short-term results of the decisions made by both companies were different, whereas in the long-term both of the decisions promote the growth of the companies, thus are actually quite similar.
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Nutt, P. C., 1999. Surprising but True: Half the Decisions in Organizations Fail. The Academy of Management Executive, November, 13(4), p. 75.