Chapter 8: Decisions and Communications Flashcards
What do main management tasks include?
- Making and implementing decisions
==> focuses on developing alternatives and on evaluating alternatives in methodologically sound manner
Decision implementation involves legitimzing decisions among those affected and communicating the information that is relevant to implementation - Ensuring decision-making capability
==> Focuses on building trust in order to secure information access and be capable of taking adequately legitimate decisions. - And identifying decision necessity
==> Involves asking the right questions, providing relevant data and exchanging soft signals.
Which steps come before implementing decisions in which order?
- Ensure Decision-Making Capacity
- Identify Decision Necessity
- Make Decision
- Implement decision
(This cycle repeats itself)
What do decisions have an impact on?
Decisions impact
- individual issues (example a purchasing decision within procurement)
- Other organisational areas (example supplier problems affecting production
- As well as the corporate environment with it s stakeholders (example employment situation at a supplier and in it s region)
Decisions also have impacts across different time horizons
Example: wrong investment choices damage a company’s assets and also limit ist ability to develop which in turn affects employees and the region
This happens for example if a manufacturing company invests heavily in business properties before a recession. When the downturn hits, assets lose value.
Or a mistaken strategic decision may lead to not investing in a new technology.
Why is a decision subject to uncertainty?
Decisions are subject to uncertainty
=> When a decision is taken, neither can all possible consequences be foreseen nor can all possible alternatives be identified
This is true especially when decisions need to be made under time pressure
What is a typical dilemma for managerial decisions?
Decisions are characerized by uncertainty and thus serve to establish certainty
–> certainty is central value creation because it provides processes with the necessary stability and those involved with the necessary orientation
But an organisation in order to be successful must take risks
=> it must venture a bit into uncertainty in order to develop new products open up new markets or create new technologies
Establishing certainty for current value creation versus developing future success potentials poses a typical dilemma for managerial decisions
=> the more certainty is sought, the more potential opportunities are lost. However entrepreneurial development happens only if risks are accepted
What is Schumpeter’s model of economic growth?
He assumes that innovations are made by entrepreneurs.
These in turn are compensated for their risks by earning additional profits from their innovations.
Innovations are later followed and copied by other companies in the imitation phase, which further promotes a sector’s economic development (Schumpeterian growth)
This process of economic development in which old products and processes are constantly replaced by new ones is also called creative destructions.
Decisions are the subject of intensive research: whether normative and prescriptive or positive and descriptive.
What is the difference between normative and prescriptive and positive and descriptive?
Normative and prescriptive:
Focuses on how decisions should ideally be made
Positive and descriptive:
Examines how decisions are made in practice and how decision processes can be further improved.
Decisions are often not based on theoretical concepts.
In practice, different factors play a role. Which are they?
- That the need for a decision (decision necessity) or even the information available in a decision process are not fully incorporated into decisions, whether consciously or unconsciously
- That decisions in organisations are often made in groups rather than by individuals.
==> Thus different perspectives, interests, and working methods must be considered. - That decision in organisations are often made routinely (according to ingrained patterns and sequences)
==> Such routinisation preserves resources and creates expectability (for example, knowing how employees are recruited and knowing who contributes a decision to which question at which point)
==> these points show that decisions in organisations are not trivial matter but require ongoing observations and treatment, with the help of prescriptive AND descriptive decision research.
- That decisions in organisations are often made in groups rather than by individuals.
What are simple decisions?
Well-structured or simple decisions involve the following conditions:
- Benefit-maximizing behavior in a clearly defined target system
- Known action alternatives
- Available information about the potential effect(s) of different action alternatives (i.e. the actual outcome)
- The existence of decision rules for choosing an alternative (solution algorithms)
Example: a delivery plan, ten delivery trucks serving 50 locations: the different alternatives (routes) can be clearly defined as well as different deployment planning (weekly plans, short term planning), the consequences of these delivery plans can be calculated or at least estimated using statistics, the target is clear: the aim is to minimise operating costs (vehicle, kilometers, driver hours), thus the preferences and decision rules are also simple and clear
What are complicated decisions?
In entrepreneurial practice, one of the before mentions conditions is often absent. Those involved face a complicated decision. Such decisions may be determined by:
- Deviation from economic utility maximisation (for example because not all alternatives are known or because decision-making involves nonrational criteria)
- Limited information and limited cognitive abilities to process it
Due to the characteristics, such decisions are accompanied by increased uncertainty.
Example: vehicle purchase ==> buyers not only consider economic optimization criteria (trunk volume, operating costs per km) but also image, personality etc. Nor does the decision maker have sufficient information (for example about long-term maintenance costs) despite various transparency-promoting mechanisms
What are complex decisions?
Complex decisions are characterised by the fact that…
- In changing environment, the alternatives are either invisible or are constantly changing or because new ones develop while others disappear
- The effects of alternatives are often unclear (because they depend on other’s behavior, are influenced by a changing context, or because multiple rounds must be considered etc.)
- Goals are constantly changing (for example because those concerned change their priorities due to the changed environment)
A typical example of complex decisions is planning a new city district. Design variants depend on what other actors (for example the responsible parties and the owners of neighboring plots) do or also on which higher-level regulations (amendment of zoning plans, building regulations etc.) exist. The consequences of developing the new district cannot be foreseen due to the social behavior of those affected (e.g. local residents) who in turn are part of a particular social environment as an open system. Will a restaurant location that seems ideal on the drawing board have the necessary atmosphere and be anchored in the community in such a way that it will be used? Neighbourhood or site planning will exist for gerenations how future generations will judge it cannot be foreseen because values also change over generations. Planning itself may also produce feedback effects: For example, affected groups may initiate political processes that subsequently lead to new regulations.
Which method is suitable for simple decisions?
One suitable method for taking decisions involving several (possibly risky) partial decisions is the decision tree.
Simple decisions are characterised by clear objectives and known alternative courses of action
==> Thus they involve evaluating alternatives with respect to how they contribute to goal attainment.
There is a “solution algorithm”
One example is the evaluation of investment alternatives based on key figures such as the return on investment (ROI).
The possible consequences of the alternatives can be certain (Decision under certainty) or fraught with known probability (decision under risk)
How does the decision tree work?
- Map the possible alternative actions across several decision levels
Example: a growth strategy presents two basic options: investing either in a new product or in a new market (including options such as choosing between two different foreign markets e.g. large versus small countries)- On a second level the action alternatives of the first level are subject to the same development possibilities (e.g. investment alternatives are combined with different, probability-weighted economic scenarios).
Every investment alternative, as well as product or market development will react differently to these economic scenarios. - In the end, it is a matter of calculating the expected value of every branch and of evaluating the total value of every alternative.
- On a second level the action alternatives of the first level are subject to the same development possibilities (e.g. investment alternatives are combined with different, probability-weighted economic scenarios).
==> This procedure enables selecting the decision variant and subdecision with the best expected value
Complicated decisions;
What is bounded rationality?
A condition where not enough stable information is available, not all variants are known, and no clear hierarchy of goals exists for selecting a variant.
Complicated decisions:
What are simplyfying heuristics?
Inexact procedures or “rules of thumb” used to make decisions under conditions of bounded rationality.
Complicated decisions:
Why are heuristics often used in decision-making?
They provide simple and comprehensible decision paths when no clear solution can be determined with reasonable effort.
Complicated decisions:
What are examples of typical heuristics?
Decomposing complex problems into subproblems.
Roll-back planning (deriving necessary measures from the goal).
Complicated decisions:
What is the minimax rule in decision-making?
A pessimistic method that maximizes the minimum expected result by choosing the option with the smallest maximum possible loss.
Complicated decisions:
How does the minimax rule contrast with optimizing the best variant?
It prioritizes minimizing risk over maximizing potential gains, often selecting safer options based on experience.
Complicated decisions;
What is an example of applying the minimax rule in decision-making?
Choosing the most familiar candidate for a management position because they represent the smallest risk, even if riskier candidates may have greater potential.
Complicated decisions: What is the downside of using the minimax rule?
It may forgo potentially better outcomes due to a focus on minimizing risk and the lack of sufficient information.
Complex decisions:
Why are complex decisions difficult during crises like a pandemic?
They involve interactions with other actors whose decisions are unpredictable and influence each other across system levels like politics, medicine, and human behavior.
