🤔Business Decision Making Unit 11 – Business Functions: Decision Making

Key Concepts and Terminology

• Business decisions involve choosing a course of action from available alternatives to achieve organizational goals
• Decision-making process consists of identifying the problem, gathering information, generating alternatives, evaluating alternatives, selecting the best alternative, implementing the decision, and monitoring the results
• Rational decision-making assumes that decision-makers have complete information and make choices that maximize benefits while minimizing costs
• Bounded rationality recognizes that decision-makers have limited information, cognitive abilities, and time, leading to satisfactory rather than optimal decisions
• Intuitive decision-making relies on experience, judgment, and gut feelings to make quick decisions in complex or uncertain situations
• Programmed decisions are routine, repetitive, and have established procedures (ordering supplies), while nonprogrammed decisions are unique, complex, and require creative problem-solving (launching a new product)
• Opportunity cost represents the value of the best alternative forgone when making a decision
• Sunk costs are irrelevant to decision-making as they have already been incurred and cannot be recovered

Types of Business Decisions

• Strategic decisions are long-term, complex choices that affect the overall direction and success of the organization (entering a new market, mergers and acquisitions)
• Tactical decisions are medium-term choices that support the implementation of strategic decisions (allocating resources, setting budgets)
• Operational decisions are short-term, day-to-day choices that ensure the smooth running of the organization (scheduling, inventory management)
• Structured decisions have clear, well-defined parameters and can be made using established rules or algorithms (reordering stock when inventory falls below a certain level)
• Unstructured decisions are complex, ambiguous, and require judgment and creativity (responding to a crisis, developing a new product)
• Individual decisions are made by a single person, while group decisions involve multiple individuals working together to reach a consensus
• Centralized decision-making concentrates authority at the top of the organizational hierarchy, while decentralized decision-making distributes authority to lower levels

Decision-Making Models and Frameworks

• Rational decision-making model follows a sequential process of defining the problem, identifying criteria, weighing criteria, generating alternatives, rating alternatives, and selecting the best alternative
• Bounded rationality model recognizes the limitations of human cognition and suggests that decision-makers seek satisfactory rather than optimal solutions
• Intuitive decision-making model relies on experience, pattern recognition, and gut feelings to make quick decisions in complex or uncertain situations
• Evidence-based decision-making emphasizes the use of data, research, and analysis to inform choices and reduce bias
• SWOT analysis evaluates an organization's strengths, weaknesses, opportunities, and threats to inform strategic decisions
• PESTEL analysis examines the political, economic, social, technological, environmental, and legal factors affecting an organization's external environment
• Porter's Five Forces model assesses the competitive intensity of an industry based on the bargaining power of suppliers and buyers, the threat of new entrants and substitutes, and rivalry among existing competitors

Data Analysis for Decision Making

• Data-driven decision-making uses data, analytics, and insights to inform business choices and optimize outcomes
• Descriptive analytics summarizes historical data to understand what has happened in the past (sales reports, customer demographics)
• Diagnostic analytics examines data to identify the causes of past events or trends (root cause analysis, correlation analysis)
  • Fishbone diagrams visually represent the potential causes of a problem, categorized into main branches (people, processes, equipment, materials, environment)
  • Pareto analysis prioritizes issues by identifying the vital few factors that contribute to the majority of the problem (80/20 rule)
• Predictive analytics uses statistical models and machine learning to forecast future outcomes based on historical data (demand forecasting, customer churn prediction)
• Prescriptive analytics recommends optimal actions or decisions based on data analysis and business objectives (pricing optimization, resource allocation)
• Big data refers to large, complex datasets that require advanced processing and analytics techniques to extract valuable insights

Risk Assessment and Management

• Risk is the potential for loss or harm resulting from uncertainty or variability in outcomes
• Risk assessment involves identifying, analyzing, and evaluating potential risks to the organization
  • Risk identification techniques include brainstorming, checklists, and scenario analysis
  • Risk analysis estimates the likelihood and impact of each identified risk
  • Risk evaluation prioritizes risks based on their significance to the organization
• Risk management strategies aim to minimize the negative impact of risks on the organization's objectives
  • Risk avoidance eliminates the source of the risk by choosing not to engage in the activity or decision
  • Risk reduction implements controls or safeguards to decrease the likelihood or impact of the risk (safety training, quality control)
  • Risk transfer shifts the financial consequences of the risk to another party (insurance, contracts)
  • Risk acceptance acknowledges and monitors the risk without taking active measures to mitigate it
• Contingency planning develops alternative courses of action to respond to potential risk events (business continuity plans, disaster recovery plans)

Ethical Considerations in Business Decisions

• Business ethics refers to the moral principles and values that guide decision-making and behavior in organizations
• Ethical dilemmas arise when there are conflicting values, obligations, or consequences associated with different courses of action
• Utilitarianism evaluates the morality of an action based on its consequences, aiming to maximize overall welfare or happiness
• Deontology focuses on the inherent rightness or wrongness of an action based on moral rules or duties, regardless of the consequences
• Virtue ethics emphasizes the character and virtues of the decision-maker, such as honesty, integrity, and compassion
• Stakeholder theory considers the interests and rights of all parties affected by a business decision, including shareholders, employees, customers, suppliers, and the community
• Corporate social responsibility (CSR) refers to an organization's commitment to operating in a socially and environmentally responsible manner, beyond legal requirements
• Ethical decision-making frameworks, such as the Potter Box or the SAD (Situation, Analysis, Decision) model, provide structured approaches to navigating ethical dilemmas

Implementing and Evaluating Decisions

• Implementation planning involves identifying the resources, timelines, and responsibilities required to put a decision into action
• Change management strategies help organizations navigate the transition and adapt to new processes, systems, or structures resulting from a decision
  • Kotter's 8-Step Change Model outlines a process for leading successful change, from creating urgency to anchoring new approaches in the culture
  • Lewin's Change Management Model describes change as a three-stage process of unfreezing, changing, and refreezing
• Communication plans ensure that all stakeholders are informed and engaged throughout the implementation process
• Performance metrics and key performance indicators (KPIs) measure the effectiveness and impact of a decision
• Monitoring and evaluation processes track progress, identify issues, and make adjustments as needed
• Post-implementation reviews assess the outcomes of a decision, capture lessons learned, and inform future decision-making

Real-World Applications and Case Studies

• Kodak's failure to adapt to digital photography illustrates the consequences of not making timely strategic decisions in response to disruptive technologies
• Toyota's lean manufacturing system demonstrates the power of data-driven decision-making and continuous improvement in optimizing operations and quality
• The Volkswagen emissions scandal highlights the ethical and reputational risks of making decisions that prioritize short-term gains over long-term sustainability and integrity
• Google's data-driven approach to HR, known as People Analytics, uses advanced analytics to inform decisions related to hiring, performance management, and employee retention
• The 2008 financial crisis underscores the importance of effective risk assessment and management in the banking and finance industry
• Patagonia's commitment to environmental sustainability and social responsibility exemplifies the integration of ethical considerations into business strategy and decision-making
• The COVID-19 pandemic has forced organizations across industries to make rapid, high-stakes decisions in the face of uncertainty, adapting their operations, supply chains, and workforce management practices