Decision-making is a central activity in individual life, organizations, institution or government. It is commonly agreed that making decisions is one of the qualities that are unique with human being. Basically, decision-making involves making choices from a number of alternatives and working towards the chosen choices. More objective definition of decision-making defines decision-making as a cognitive process that help people to choose actions to be taken among other possible alternatives. The process of decision-making have attracted many scholars who try to explain how decisions are made and how decision-making can be improved. As consequence, various decision-making theories have been developed. Despite of the various theories that explain decision-making, decision-making in management is challenging.
Decisions are made in a day-to-day basis in management. In most of the decisions, decision makers are not conscious of the process. In other cases, decision makers have to make decisions consciously. In all the cases, the outcome of the decision made is the major factor that is used to differentiate a good decision maker from other (Ranyard, Crozier & Svenson, 1997, p. 67). Although decision-making is a day to day activity in management, sometimes decision-making is not easy (Adler, 1998, 76). One of the cases when making decision is not easy is when it involves high financial implications. Decisions that involve huge outlays of capital are some of the decisions that are not easy to make. In such decisions, decision makers tend to use their gut other than other rational decision-making approaches (Elsenhardt, 1989, p. 87). Gut decision-making has its benefits but it can lead to high implication to an organization.
Challenge for Capital outlays
Technological advancement has brought great changes in business environment. Technological advancement has allowed new technologies for production and other activities to be developed. Although technological advancement has brought fast and efficient technologies, is has brought various challenges in management (Shefy & Sadler 2004, p. 78). Adopting some new technology involves substantial financial implications. In some cases, the economic implication of new technology may limit the management’s commitment to adopting the technology. Fear for the outcome of investment in new technology sometimes hinders the management from adopting new technology. In addition, fast changes in technology have made making decision on capital outlays challenging (Raiffa, Bell, & Tversky, 1998, p. 56-59). Most organization prefers to invest in equipments or technologies that would serve for a longer period.
Capital outlays sometimes become necessary in organizational management. Capital outlays may include acquiring new equipments, altering or replacing previous equipments, putting of new structures and non-structural improvement (Frederick, Lynda & Catherine, 1998. P. 98). Decisions for capital outlays that do not involve huge investment are made with less difficulty. However, most decision makers find it challenging to make decisions on capital outlays that involve huge investment (Adler, 1998, p. 56). Despite of the difficulties in making decision on capital outlays involving huge investments, these decisions have to be made for an organization to grow. Unlike other decisions, decisions that involve huge capital outlays are often gut decisions. The decision involves making risky judgments among ambiguous alternatives. Such decisions involve not only knowledge on decision-making techniques but also the management’s courage to make the decisions.
Overview of decision-making
Decision-making in management has been widely researched. Various researcher and scholars have tried to explain how human make decision under various circumstances. Various individuals view decision-making from different perspectives. From psychological perspective, the role of preference and values are considered in evaluating individual decision-making. Using cognitive perspective, decision-making is viewed as cognitive interaction between an individual with environment. From normative perspective, the role of logic and rationality in decision-making is addressed (Buchanan & Connell, 2006, p.89). Decision-making is also viewed a problem solving activity that try to come up with solutions for problems. From all perspectives of decision-making, decision-making is viewed to be a reasoning or emotional process that lead to making some choices from various alternatives. Recent researches on decision-making emphasize on logical decision-making. This is the decision-making process that aim at reaching a decision by evaluating various factors. Logical decision-making has become an important role for professionals. In this case, professionals use their knowledge to reach to a decision. Logical decision-making involves using known facts and information to evaluate circumstances before reaching a decision.
Logical decision-making is not always applicable. For logical decision-making technique to be used, the individual making the decision must have enough information over the issues and have a plane of reference to make the decision (Raiffa, Bell & Tversky, 1998, p. 66). These conditions, however, are not always present; a decision maker may not be having enough information about an issue or lack the time to use logical decision-making. In situations that have high time pressure, high risk or high ambiguity, decision makers tend to used naturalistic method such as intuition. In unstructured decision-making approaches such as intuition, the decision maker’s experience, vision or courage play an important role rather than logical evaluation of alternatives.
Conventional decision-making involved various steps. Problem analysis is usually done before decision-making. In structured decision-making, problem analysis is used to evaluate the conditions that stimulate the need for a decision (Raiffa, Bell & Tversky, 1998, p. 75). This process aims at providing the information required for decision-making. To make a decision, objectives for the decision must be identified and arranged in order of importance (Adler, 1998, p.43). After objectives a re identified various alternative actions that can lead to the objectives are identified. The various alternatives identified are then evaluated in order to come up with the best alternative that captures all or most of the objectives. After the alternatives are evaluated, a tentative decision is then reached (Ranyard, Crozier & Svenson, 1997, p. 43). The tentative decision is then evaluated to ensure that it does not have bad effect to an organization. In everyday decision-making, individuals list and evaluate advantages and disadvantages of a decision object before settling on a specific decision. Some individuals settle to a decision that seems to have a high probability of success while others settle to the first option that appears to them. The role of chance, influence of authority and prayer cannot be ignored in day to day decision-making.
In decisions involving high risk and ambiguous alternatives, the conventional ways of decision-making may fail to be applicable. The structured way of decision-making assumes that through the process of decision-making, a decision maker would be able to acquire the necessary information and be able to choose the best alternative from the available alternatives. The decision analysis method also assumes that the decision maker is able to take action towards the identified alternative (Buchanan & Connell, 2006, p.105). However, the high risks and lack of clear alternatives can inhibit a person from making a decision. Most huge capital outlays are characterized by high risks and lack of clear alternatives to choose from. Capital outlays such as acquiring new equipment, making major replacement or putting up of new structures involves high risk. The decision makers in huge capital outlays have to consider the high risks of loss in case of failure. The decision makers also have difficulty in choosing an alternative from various unclear alternatives.
Many industries find decisions on reinvestment difficult to make. To remain competitive, industries have to carry out capital outlays from time to time. Most of the reinvestment and capital outlays involves high amount of investment. An industry may require acquiring new technology in order to improve performance and increase its competitive advantage (Ullman, 2006, p.73). Some of the equipments in an industry may require replacement for various reasons. The industry may require replacing some equipment in order to change its capacities, change some product, and improve performance and other factors. Capital outlays may also be made necessary by changes in technology. Most of the capital outlays and reinvestments involve huge investment. When making decisions on huge capital outlays, the decision makers are aware of the financial implication that they commit to their organizations.
Gut Decisions in Capital Outlays
One of the major factors that are considered in capital outlays and reinvestment is their economical feasibility. Although the intended capital outlays may be technologically viable, decision makers may fail to accept the outlays because they fail to see the economic implication of the outlays. Some industries may continue to use some technologies even when there are other better technologies that could be used. An example of an industry where economic factor impede adoption of new technologies is the textile industry. Despite of existence of other technologies that can improve the speed efficiency, textile industry insists on use of older technologies. Despite of the older technologies being technologically behind, the fact that they remain economically viable makes decision makers to opt not to replace them. For example, although the speed of looms can be increased significantly by new technology, the increase may not have significant economic implication. Decision on capital outlays in textile industry usually lead to a dilemma. New technologies have other benefits such as efficiency, being quieter, easy to work with and other benefits. Despite of the obvious benefit from new technology, the decision to acquire the technology may be difficult. Although the new technology can increase the company’s competitive advantage and place it in a better position in the future, its cost and current economic implications can discourage a company from acquiring it. Another challenge develops when old technologies break down and need to be replaced. The decision makers are divided between replacing the equipments that have broken down with other new equipment of the old technology or replace them with equipments of new technology.
Conflict between the long-term and short-term goals of an organization makes decisions on huge capital outlays to be gut decisions. Capital outlays have financial consequences that can affect the performance of an organization. Some decision makes avoid capital outlays even when the outlays have high positive implication in the future (Irving, 2005, p. 67). Conducting capital outlays have high effect on the funds available for investment. By spending on capital outlays, the management would have less to spend on investment. Most managers are more concerned on the level of returns on the funds invested. Since capital outlays may not have immediate returns, the decision makers may opt for other investments that have immediate returns. In most organizations, the middle managers are responsible for solving their organization’s technological issues, investments and meeting their organizations goals. The middle managers are given pressure to meet their organization shorter targets. Despite of possible positive effect of capital outlays, middle managers may opt to invest in other investments that have high short-term returns.
Most organizations limit the level of expenditures. Top managements may give directives that limit that limit the level of expenditure that is allowed in an organization (Irving, 2005, p. 114). However, it is the middle managers that are responsible for most the decisions on equipments and technologies. Having been given limits on their expenditure, middle managers may avoid investments that involve high expenditure. Despite of the fact that some capital outlays may be deemed necessary, the middle level managers may opt for other alternatives that fall within the expenditure limit. For example, instead of replacing some faulty equipment, the management may opt for repairs in order to avoid the high cost involved with capital outlays.
The case of Alchemy is a good example of where decisions become gut decisions. In 1975, the coking plant of the chemical company was faced with difficulties (Jackall, 1989, p. 81). A gigantic battery used in coking was having a problem. The management had to decide whether invest six million dollars in restoring the battery to its form. However, the chief executive officer had given instruction limiting the level of expenditure in the company. Because of this, the managers only allocated small amount for repairs until when the battery collapsed completely in 1979. As a consequence of the collapse, this led to a breach of contract and violation of pollution regulations. The financial implication of the collapse was very high. The total cost of breach of contract, lawsuits and repairs was more than $100 million (Jackall, 1989, p. 83). Had the management taken a decisive action to spend the $6 million on the battery, then they could have saved their company from the high cost.
Huge capital outlays involve high risk of failure. Decision makers on capital outlays fear for probable loss that can result from failure. Because of failure, these decisions are postponed frequently or sometimes abandoned. The information available for making decision may not be enough while the result may be easy to foretell. In such a situation, gut decision is required to overcome the dilemma.
Decision-making is a necessary role in management. Various decision-making theories try to explain how decisions are made and how they can be improved. Although decision-making is a day to day activity, making decision in some cases is not easy. Decisions in huge capital outlays are not easy to make. The decisions require the decision makers to overcome their fears and make decision even without all the information. These decisions are in most cases gut decisions.
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