The management of an organization is based on decisions arrived at by the management. The decisions are evaluation of various options open to the company. The approach to evaluation of such decisions calls for rationality in their evaluation. This is to be in a position to make best use of the resources time and other factors of interest to the issue. This study analyses such issues and in relation to how the managers arrive at those decisions. The study analyses use decision trees, pay-off matrix and intuition in specific examples drawn from the global domain.
Decision making in business
The management of any organization is dependent on the strategy that the organization is following. This strategy is a combination of various objectives that ought to be achieved through the normal operation of a business. The management of a business in the present world are faced by a lot of factors such mergers, legality issues, environmental sound issues, technology advancement, decision of which business model to use or even the staff to employ (Haines,2000).
These may not be stated within the strategy or objectives but the management is under an obligation to make the best decisions as a contribution to the overall objectives of the organization. Eliezer S. Yudkowsky (2010) goes ahead to diversify the individual elements associated with the rationality of the business. He explains the issue of rationality to be based on twelve virtues curiosity, relinquishment, lightness, evenness, argument, empiricism, simplicity, humility, perfectionism, precision and scholarship. But he indicated that the final virtue is the intention of the decision. Any decision shall be made in a manner that allows the management move in a direction of attaining the objectives.
However these decisions are not just arrived at, they have to made with reference to the objectives being pursued by the organizations. The management ought to make sure that the organization’s performance is not compromised by biasness. The management ought to evaluate every option available in reference to the effect of the decision to its financial impact, the effect on the structure of the organization and at the same time its effect of the integration with employees.
At most of these times these managers will be faced by problems that require their input, and these problems will at times have little information known to them, the effect of the decision may not be known adequately, the issues involved may vary for example on basis of the markets (D’Aveni, 2001). The organization may be the first of the kind to implement hence they do not have an idea of what will happen for comparison.
However, this situation is at times complicated by the fact the amount of resources such as money may be limited and the time of evaluation is also limited. This kind phenomenon is referred to as bounded rationality. Despite the fact that the manager would like to act in the most rational way to achieve the best decision he may not be in a position to do so due to limitations on information, resources and time.
The approach that managers use to arrive at these decisions depends on the: situation at hand, the person being dealt with and the organization that is handling the situation. There are basically two means of arriving at the required solution that are mainly used; analytical methods and intuition (D’Aveni, 2001). Analytical methods refer to a method where a particular problem is synthesized using algorithms and mathematical models as a guide to the decision to be taken. Previously accountants used traditional discounting methods such as Net Present Value, Annuities, and Rate of Return to handle analysis on options(Florida R, 2002)..
Other methods such as use of decision trees, payoff matrix are other analytical methods used in evaluation of projects. However, such methods were later criticized on their failure to include the flexibility of mangers, benchmarked projects, re-evaluation of the projects at other stages among others. These methods however have been modified to include some flexibility for example Florida (2002) came up with decision-tree based algorithm that would include flexibility in analysis of systems with dynamics.
On the other hand mangers can also use a method referred to as intuition. This refers to an informal method of analysis where a manger uses his creativity, personal experience and near forecast to come up with a decision. The information available relating to some problems may be too little for use of analytical methods. Some situation however depends on creativity to be in apposition to handle, while other projects also may bee too tricky to evaluate the happening in future.
In such situation you brainstorm the opportunities availing themselves against the challenges of obtaining those opportunities and look whether to take or not. Psychologists have often been quoted saying that the human sub-conscious mind is a database of brilliant ideas. Intuition has been related to creativity and discoveries. All it takes is to feel right with your emotions and go for it.
The rest of the study will be used to evaluate examples where decision trees, pay-off matrix and intuition have been used in the analysis of business decisions:
Use of decision trees
This refers to a chronological way of solving problems which utilizes a notion of two nodes. The two nodes represent the probability of two kinds of possibilities occurring. The two possibilities add to a hundred percent. Building of the decision trees involves the following steps (D’Aveni, 2001);
- The decision tree is drawn using two kinds of nodes; circles and squares where the circles represent the uncertainties and squares represent the decisions that can be made.
- You evaluate all the possibilities from which arise
- The value of each decision will be calculated from left to right
- The value of an uncertain outcome by multiplying the value with their probabilities.
For example a company wishing to introduce measure to prevent fire may use either a smoke and fire detector or a motion detector or neither. The evaluation may look like some thing below (Haines,2000). The decision to use either of the detectors or none is evaluated to arrive at the EV below the diagram.
EVnode = (EVsuccess + EVfailure) = $450,000 + (-$50,000) = $400,000.
The Gerber company is one which has been known to use decision trees with success. In 1998 a CSPS report was released by Greenpeace. The report indicated dangers of dealing with ‘phthalates’ a composite in PVC. The report was just released before the boom for toys expected in Christmas time. Actually, Berger used to make small toys using PVC but had not been approached by anyone with a health relate issues as a result of using the products from Berger.
However this report was highly publicized and a note to Berger indicated that it would be implicated in the report as one of the companies that was using the substance. At that point the company was faced with two options none of which would be beneficial to it; one was waiting for the report to be released and later assess consumer reaction before deciding the kind of action to take. The other was to pursue a solution to the problem at the time aggressively and make sure it worked to the companies benefit. The company’s management came up with a decision tree to evaluate all the possible actions that would happen if the report was released.
The decision tree had nodes for expected reactions of the market once the report was released. The decision tree was used by the company to evaluate what the best alternative was from; the company would cease distributing the product and issue a corporate responsibility report, recall the items it had distributed to customers with the component of phthalates Wait for the response from customers and assume the report and continue with its endeavors (Florida R, 2002)..
Each of these solutions was assigned revenue and probability of occurrence and analysis was done from the most viable solutions. The management as a result of the analysis decided to continue with its own initiatives without paying reference to the Greenpeace. This decision worked to its favor as it retained its market share within the industry.
Use of pay- off matrix
This kind of decision making was borrowed from the game theory. In this kind of decisions the traders assume their competitors as a competitor in a game. His reaction leads to a reaction from his competitor. If a company fails to take up a market the competitor may take it to his advantage. In such a case the you have to anticipate what you will do that your competitor will not. The action you decide to partake should put you in a better position as compared to the reaction of your competitor.
One of the practical examples often used is the case of Boeing and Airbus companies. This issue was brought to attention by the offering of Subsidies by government to Boeing as compared to Airbus. The analysts indicated that by denying the Airbus the subsidies it actually put Boeing ahead in terms of competition. This was after Boeing launched it two big airplanes Boeing 757 and 767. This conception is experienced in their day to day operation.
For example if Airbus intends to launch a product that Boeing has already launched which means it has a prior advantage in market, it will have to consider to enter the market or stay out and earn zero profit. If Airbus enters the market, Boeing will have to weigh to accommodate Airbus without intervention of the market, or it may decide to wage a war price such as reduction of price or offering other components. The decision arrived may be based on analytical method such as backward induction among others
Panasonic is one of the largest /east companies that have been known to succeed with a lot of greatness. Its founder Matsuhita Konosuke, attributed that success to the power intuition. According to him he articulates his success to a Japanese belief I Ching. According to the believe ; having a lot of troubles make one’s will perfect and less difficulties ruins the being, when you reach a deadlock you have to look for options and change and the fact that its not the business man who should own the idea but there should be some natural principle or a social being behind it (Goussev 2008)
This man who did not attend any formal education is credited with the invention of second generation bicycle power batteries. He also made the first electric iron. He also devised and instituted his company dividing it into three departments for handling radios, lighting and batteries respectively. In the organization’s motivation policy known as ‘Matsuhita spirit’ the giant electronic company was formed. He also established a institute called PHP after the war.
He is accredited with great decisions such as expansion to America, his collaboration with Phillips company and the famous 1956 electric boom as a result of Panasonic’s five year expansion plan (Florida R, 2002). At his era there were few analytical methods known to entrepreneurs but he single handed managed to form the Giant Company. His company had branches in New York, Thai, Mauritius and his homeland Japan. His death in 1989 was greatly celebrated for having founded one of the greatest Electric companies.
The management of any organization is faced opportunities and it ought to evaluate the various options at it disposal. The above discussed method will be very handy in solving such issues.
List of references
D’Aveni R A (2001). Strategic supremacy – how industry leaders create growth, wealth, and power through spheres of influence. New York. Free Press.
Eliezer S. Yudkowsky (2010) Twelve Virtues of Rationality. Web.
Florida R (2002) Rise of the creative class – and how it’s transforming work, leisure, community and everyday life. New York: Basic Books.
Goussev M, 2007 From Tao to Dow: Tapping into your inner wisdom and intuition in decision making with the ancient Chinese classic the book of changes. Web.
Haines, Stephen G (2000) Systems thinking approach to strategic planning and management. Boca Raton: St. Lucie Press.