Management decision

from Wikipedia, the free encyclopedia

Management decisions are the finding, evaluation, selection and implementation of alternative courses of action by the management of a company with the aim of ensuring the company's success. The company and management are usually confronted with complex decision-making situations or problems. These are often no longer conceivable for humans and require an analytical solution to the problem in order to be able to make a decision.

To ensure the company's success, management must make good decisions. The best or a good decision is not necessarily the decision that leads to the best or a good result from the decision ex post. It is the decision that at the time of choosing an alternative was the one that would have been the right one based on the information available. Accordingly, the alternative courses of action must be evaluated according to the best possible standards and meaningful decision-making preparation must be carried out in order to be able to make a good and well-founded decision and to guarantee the company's success. Controlling is often responsible for providing and evaluating the information required in the management decision-making process in a supporting role at.

Decision theory

Decisions can be viewed both from the psychological or sociological (descriptive decision theory ) as well as from the mathematical or economic ( prescriptive or normative decision theory) perspective. The two perspectives pursue different objectives. In the following part, "Decision-making process", a prescriptive approach to decision-making in companies is to be examined in more detail and to some extent reference to real problems is made.

Descriptive decision theory

The aim of descriptive decision theory is to describe real processes in decision-making and to be able to predict the real procedure or the decision. General laws are formulated using an inductive approach based on observations, experiments and the like. It is often assumed that there is only one single decision maker. For companies, it is accordingly often assumed that the company acts as a decision maker. This is to be viewed critically, as, for example, goals can compete with one another in a company.

Prescriptive Decision Theory

The aim of prescriptive decision theory is to improve the decision-making behavior of decision-makers. In order to achieve this, models and recommendations are developed that support management in making and perceiving decisions and thus should lead to more rational decisions. Especially in the area of ​​decision theory in companies and thus for management decisions, it is important to enable the most objective possible perception and implementation of the decision-making process and to negate subjective influences in the decision as best as possible. Realizing the optimal decision by the management is thus the main goal of prescriptive decision theory.

Decision making process

1. Perception of problems

A decision-making situation starts with a very simple sounding step, which is much more complicated in practice, knowing that there is a situation that requires a decision. Because the simplest of all decisions is the failure to make a decision, which often gets us into trouble. In a situation in which the company is satisfied with its current situation and sees no problem and thus makes the "implicit decision" of doing nothing or changing anything. But the question is whether this is the right decision in the specific situation. The decision is only possible by analyzing the situation and alternative courses of action. Humans have a tendency to refrain from making decisions because they feel more responsible for actions taken than for those that have not been taken. Thus, the person has the tendency to stay in a satisfied situation. A company or its manager must always ask whether the situation could be improved and what alternatives there are. This requires awareness of the decision-making situation. In reality, too large an alternative space is often perceived as a nuisance and there is a tendency not to change the tried and tested and to be satisfied with the status quo . Only when serious problems arise does management become aware of the decision-making situation. If the management of the company has become aware of the problem or the decision-making situation, it is faced with the task of communicating the problem with the controlling department, the supervisory board and / or external consultants. The problem needs to be outlined and verified in order to increase the willingness to find a solution. In order to avoid misunderstandings, a clear definition of terms and key figures is required.

2. Specification of the problem and definition of goals

If there is a willingness to solve and if there is a general overview of the problem, the management must define the solution goal. This must be formulated clearly and unambiguously and must be limited to a single goal. A clear interpretation of the solution is only possible later on by defining a goal. The goal should be reduced to a single meaningful, numerical and realistically achievable success variable with the help of a solution process. Constraints of the goal are to be listed. At this point, management should already be working on a draft solution method. The procedures differ in their efficiency and depending on which one is used, the company incurs different costs. In order to determine a method, a consensus should be found together with the controlling as to which method is affordable and can still demonstrate a performance that corresponds to the problem situation.

All terms of the decision-making situation must always be clearly defined. Inadequate precision of the terminology leads to misinterpretations, discretion and the like. It must therefore be clearly defined what is meant by terms such as “market position”, “budgeted value” or the like. The time reference and the like must always be established (example: increase of the relative market share by 10% in 2 months, 10 years).

3. Solution method and need for information

From the large number of solution methods, the management now has the task of choosing a solution method for the previously clearly defined problem with its clear objective. The already outlined solution method helps to filter out a suitable method by making it more precise. Based on the chosen solution method, it is now possible to identify the individual options for action and to derive the necessary information. The search for different alternative courses of action is a very important factor, since evaluating the wrong alternatives also leads to the wrong or less than optimal decisions. It is important not to focus too early on just one alternative course of action, as otherwise interesting and possibly lucrative options will be disregarded.

When it comes to information needs, it should always be noted that a company has limited, competing resources . The decision for one measure often means that another cannot be carried out. So the problem cannot be viewed in isolation from other problem solutions. Possible decisions by the competition can also have an influence on the problem situation and should therefore be included if possible.

4. Obtaining information

If you have an overview of the required data, it is now time to get the data. However, it is sometimes not possible to obtain all data from reality or the time required is very high. However, since the information is required, it is the task of management itself or by involving specialists (experts in their field) to make the best possible, well-founded assumptions about sizes. It is crucial that the most important elements of the solution method are prioritized first, which can be specified more precisely if necessary and when available. Assumptions that are made should be clearly defined and transparently accessible to everyone. Assumptions have a decisive influence on the result, so there should be a consensus here about the assumptions made and to be made. Often the results are discussed at the end of the result calculation, whereby these discussions are partly due to differences in assumptions. Therefore, it is important to discuss and reflect on the assumptions at this stage of the decision-making process and ultimately to find a consensus on the assumptions. The results are derived rationally through an analytical approach and there is no longer any room for discussion if there is agreement on assumptions.

Another factor to consider when making assumptions is inaccuracy . People tend to give a “more precise statement” (a clear clear value) more value or a higher probability than a vague assertion. When specifying assumption, however, there is usually a rather vague knowledge of what value the variable will assume. Therefore, the assumptions should be kept more vague than precise and especially in distributions rather than using an exact value (e.g. the expected value ) for the variable. Example: Instead of assuming that the price for iron ore is 45.43 €, the assumption for the iron ore price is made by means of a distribution (e.g. a triangular distribution ), with the price ranging from a minimum of 40 € to a maximum of 50 Move € with a most likely value of € 46. Thanks to modern computer simulations , probability distributions can easily be built into the models as values. It should also be pointed out that humans tend to give positive events higher probabilities and unpleasant events lower probabilities.

It also applies to information that can be obtained that it is more likely to be indicated by means of distributions, since future values ​​are always subject to uncertainties and can therefore fluctuate both upwards and downwards. One of the essential challenges of the assessment process is to assess the risks and opportunities to a sufficient and above all appropriate level. Distributions are the attempt to make uncertainties comprehensible and quantitatively usable for humans.

The procurement of information is strongly influenced by the perception and attention of the decision maker. In practice, people often only perceive what fits their own scheme and thus confirm their own assumptions. Likewise, frequent misjudgments of the probabilities of uncertainties can be found.

5. Assess problem solving and options for action

The solutions of the alternative courses of action are then determined from the information obtained with the aid of the specified solution method. Using computer simulation programs (e.g. @Risk), the information and the model can be brought together to the previously defined target value ( see 2. ). The program calculates various future scenarios with different risk parameters. It should be pointed out here that among the risk variables, in addition to the general variables (from information and assumptions), the possible reactions of third parties who are affected by our decision or who may be affected by this must be taken into account. As an example, we can mention competitors who can react to our decision by making their own decisions. The result of the scenario analysis is output by the computer program in the form of a distribution that requires interpretation. The result will show the probabilities of scoring and the spread of values. The spread reflects the risk level of the solution. A solution with a high variance has a higher risk than one with a low variance. The results obtained in this way can now be compared using a matrix , for example. The comparison of the alternative courses of action ultimately leads to the decision or the definition of an alternative course of action. When specifying, however, you should not immediately bet on the first alternative that appears correct. The alternative courses of action are based on assumptions that are subject to uncertainties. Therefore, the possible alternatives should be checked for their sensitivity to the assumptions (what happens if the assumption is violated?). An alternative that reacts rather weakly to acceptance violations is preferable to one with strong changes.

So that the group does not advocate an alternative in advance, representatives for each alternative who are for or against a certain alternative are determined in advance. In this way, the group of decision-makers actively tries to find pros and cons for the respective alternatives and thus to find a more balanced and open decision-making situation. Such an approach ensures the quality of the decision, as a more active and open reflection of the alternative courses of action is carried out. The examination of the decision by a neutral party is also an (additional) option.

But the decision also depends on human factors. The risk appetite of the people depends very much on whether it is in a positive situation (profitability, the company is doing well and aim to further improve the situation) or negative situation (loss situation, the company is as bad, it may write Losses and faces bankruptcy and the aim of loss recovery is pursued). In positive situations, people are usually more risk averse than in negative situations, in which they are more willing to take risks in the hope of “straightening out” the situation. Furthermore, people's preferences are subject to certain changes over time and the decision-maker is often not fully aware of these and depends on the presentation of the results or the like. The preferences do not always have to be consistent in themselves, but can be axiomatically contradicting. Management can be for variant A without any change in the situation on day one and variant A is the worst on day two and it will opt for something completely different, only because of a change in preference or no perception of preference at all.

6. Implementation

The decision must now be revised in such a way that it can be intuitively understood and implemented by all those affected by the decision in the company . The management must transfer the decision accordingly in a plan that includes the individual measures. It is important that it is clear who bears which responsibility. Instruments for monitoring the implementation process should also be defined. Should new information arise, then the person tends not to revise his decision once made and to stand by it. However, should new information lead to the conclusion that the decision made is no longer a “good decision”, it should be revised. Often money has already been invested and the company has already incurred many costs. In this case, however, the situation must be reassessed; if the result leads to the project not being continued, this decision should be made. However, due to the “ sunk cost effect”, this often does not happen.

literature

  • Dr. Werner Gleißner: Psychology of entrepreneurial decisions - How do entrepreneurs deal with risks and how should they make decisions? . In: Psychological Expertise for Successful Entrepreneurship in Germany, Berlin 2010, pp. 77–87.
  • Dr. Werner Gleißner: 10 commandments for good business decisions. In: Controller Magazin , Wörthsee-Etterschlag 4/2014, pp. 34–41.
  • Elisabeth Göbel: Decisions in companies. Munich, 2014, ISBN 978-3-8252-8563-0 .