Managing for Competitive Advantage (part 4)

Managerial Decision Making

 by

 Charles Lamson

 The Stages of Decision Making

 The ideal decision making process moves through six stages at companies that have institutionalized the process, these stages are intended to answer the following questions: What do we want change? What's preventing us from reaching the desired state? How could we make the change? What's the best way to do it? Are we following the plan? and How well did it work out?

More formally, as Figure 1 illustrates, decision makers should (1) identify and diagnose the problem, (2) generate alternative solutions, (3) evaluate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the decision.

FIGURE 1

The Stages of Decision Making

Identifying and Diagnosing the Problem

The first stage in the decision-making process is to recognize that a problem exists and must be solved. Typically, a manager realizes some discrepancy between the current state (the way things are) and the desired state (the way things ought to be). Such discrepancies---say, in organizational or unit performance---may be detected by comparing current performance against (1) past performance, (2) the current performance of other organizations or units, or (3) future expected performance as determined by plans and forecasts.

Recognizing that a problem exists is only the beginning of this stage. The decision maker also must want to do something about it and must believe that the resources and abilities necessary for solving the problem exist. Then the decision maker must dig in deeper and attempt to diagnose the true cause of the problem symptoms that surfaced.

For example, a sales manager knows that sales have dropped drastically. If he is leaving the company soon or believes the decreased sales value is due to the economy which he cannot do anything about, he will not take action. But if he does try to solve the problem, he should not automatically reprimand his sales staff, add new people, or increase the advertising budget. He must analyze why sales are down and then develop a solution appropriate to his analysis. Asking why, of yourself and others, is essential to understanding the real problem.

Useful questions to ask and answer in this stage include:

• Is there a difference between what is actually happening and what should be happening?
• How can you describe the deviation, as specifically as possible?
• What is/are the cause(s) of the deviation?
• What specific goals should be met?
• Which of these goals are absolutely critical to the success of the decision?

Generating Alternative Solutions

In the second stage, problem diagnosis is linked to the development of alternative courses of action aimed at solving the problem. Managers generate at least some alternative solutions based on past experiences.

Solutions range from ready-made to custom-made. Decision-makers who search for ready-made solutions use ideas they have tried before or follow the advice of others who have faced similar problems. Custom-made solutions, by contrast, must be designed for specific problems. This technique requires combining ideas into new, creative solutions. For example, the Sony Walkman was created by combining two existing products: earphones and a tape player. Potentially, custom-made solutions can be devised for any challenge. In later posts, we will discuss how to generate creative ideas.

Importantly, there are potentially many more alternatives available than managers may realize. For example, what would you do if one of your competitors reduced profit prices? An obvious choice would be to reduce your own prices. But when American Airlines, Northwest Airlines, and other carriers engaged in fare wars in the early 1990s, the result was a record volume of air travel and record losses for the industry. 

Fortunately, cutting prices in response to a competitor's price cuts is not the only alternative available. Although sometimes it is assumed to be. If one of your competitors cuts prices, do not automatically respond with the initial, obvious response. Generate multiple options, and thoroughly forecast the consequences of these different options. Options other than price cuts include nonprice responses such as emphasizing consumer risks to low-priced products, building awareness of your product's features and overall quality, and communicating your cost advantage to your competitors so they realize that they cannot win a price war. Winn-Dixie used that last strategy to its advantage against Food Lion, and the stores stopped competing on price. If you do decide to cut your price and as a last resort, do it fast---if you do it slowly, your competitors will gain sales in the meantime, and it may embolden them to employ the same tactic again in the future. 

Evaluating Alternatives

The third stage involves determining the value or adequacy of the alternatives that were generated. Which solution will be the best?

Too often, alternatives are evaluated with little thought or logic. Fundamental to this process is to predict the consequences that will occur if the various options are put into effect.

Managers should consider several types of consequences. Of course, they must attempt to predict the effect on financial or other performance measures. But there are other, less clear-cut consequences to address. Decisions set a precedent; will this precedent be a help or a hindrance in the future? Also, the success or failure of the decision will go into the track records of those involved in making it.

Refer again to your original goals defined in the first stage. Which goals does each alternative meet and fail to meet? Which alternatives are most acceptable to you and to other important stakeholders? If several alternatives may solve the problem, which can be implemented at the lowest cost? If no alternative achieves all your goals, perhaps you can combine two or more of the best ones.

Key questions are:

• Is our information about alternatives complete and current? If not, can we get more and better information?
• Does the alternative meet our primary objectives?
• What problem could we have if we implement the alternative?

Of course, results cannot be forecast with perfect accuracy. But sometimes decision-makers can build in safeguards against an uncertain future by considering the potential consequences of several different scenarios. Then they generate contingency plans---alternative courses of action that can be implemented based on how the future unfolds.

For example, scenario planners making decisions about the future might consider four alternative views of the future state of the U.S. economy: (1) An economic boom with 5 to 6 percent annual growth and the United States much stronger than its global competitors; (2) a moderately strong economy with two to three percent growth and the United States pulling out of a recession; (3) a pessimistic outlook with no growth, rising unemployment, and recession; or (4) a worst-case scenario with global depression, massive unemployment, and widespread social unrest.

Some scenarios will seem more likely than others, and some may seem highly improbable. Ultimately, one of the scenarios will prove to be more accurate than the others. The process of considering multiple scenarios raises important what if questions for decision-makers and highlights the need for preparedness and contingency plans.

As you read this, what economic scenario is unfolding? What are the important current events and trends? What scenarios could evolve six or eight years from now? How will you prepare?

Making the Choice 

Once you have considered the possible consequences of your options, it is time to make your decision. Important concepts here are maximizing, satisficing, and optimizing.

Maximizing is making the best possible decision. The maximizing decision realizes the greatest possible consequences and the fewest negative consequences. In other words maximizing results in the greatest benefit at the lowest cost, with the largest expected total return. Maximizing requires searching thoroughly for a complete range of alternatives, carefully assessing each alternative, comparing one to another, and then choosing or creating the very best.

Satisficing is choosing the first option that is minimally acceptable or adequate; the choice appears to meet a targeted goal or criterion. When you satisfice, you compare your choice against your goal, not against other options. Satisficing means that a search for alternatives stops at the first one that is okay. Commonly, people do not expend the time or energy to gather more information. Instead, they make the expedient decision based on readily available information. Satisficing is sometimes a result of laziness; other times, there is no other option because time is short, information is unavailable, or other constraints make it impossible to maximize.

Let's say you are purchasing new equipment and your goal is to avoid spending too much money. You would be maximizing if you checked out all your options and their prices, and then bought the cheapest one that met your performance requirements. But you would be satisficing if you bought the first one you found that was within your budget and failed to look for less expensive options.

Optimizing means that you achieved the best possible balance among several goals. Perhaps, in purchasing equipment, you are interested in quality and durability as well as price. So, instead of buying the cheapest piece of equipment that works, you buy the one with the combination of attributes, even though there may be options that are better on the price criterion and others that are better on the price criterion and others that are better on the quality and durability criteria.

The same idea applies to achieving business goals: One marketing strategy could maximize sales, while a different strategy might maximize profit. An optimizing strategy is the one that achieves the best balance among multiple goals.

Implementing the Decision

The decision-making process does not end once a choice is made. The chosen alternative must be implemented. Sometimes the people involved in making the choice must put it into effect. At other times, they delegate the responsibility for implementation to others, such as when a top management team changes a policy or operating procedure and has operational managers carry out the change.

Those who implement the decision must understand the choice and why it was made. They also must be committed to its successful implementation. These needs can be met by involving those people in the early stages of the decision process. At Steelcase, the world's largest manufacturer of office furniture, new product ideas are put through simultaneous design, engineering, and marketing scrutiny. This is in contrast to an approach in which designers design and the concept is later relayed to other departments for implementation. In the latter case, full understanding and total commitment of all departments are less likely.

Managers should plan implementation carefully. Adequate planning requires several steps:

1. Determine how things will look when the decision is fully operational.
2.  Chronologically order, perhaps with a flow diagram, the steps necessary to achieve a fully operational decision.
3.  List the resources and activities required to implement each step.
4.  Estimate the time needed for each step.
5.  Assign responsibility for each step to specific individuals.

Decision makers should assume that things will not go smoothly during implementation. It is very useful to take a little extra time to identify potential problems and identify potential opportunities. Then you can take actions to prevent problems and also be ready to seize on unexpected opportunities. Useful questions are:

• What problems could this action cause?
•  What can we do to prevent the problems?
•  What unintended benefits or opportunities could arise?
•  How can we make sure they happened?
•  How can we be ready to act when the opportunities come?

Much of this analysis is concerned with implementation issues: how to implement strategy, allocate resources, organize for results, lead and motivate people, manage change, and so on. View these upcoming posts from that perspective, and learn as much as you can about how to implement properly.

Evaluating the Decision

The final stage in the decision-making process is evaluating the decision. This means collecting information on how well the decision is working. quantifiable goals---a 20 percent increase in sales, a 95 percent reduction in accidents, 100 percent on-time deliveries can be set before the solution to the problem is implemented. Then objective data can be gathered to accurately determine the success or failure of the decision.

Decision evaluation is useful whether the feedback is positive or negative. Feedback that suggests the decision is working implies that the decision should be continued and perhaps applied elsewhere in the organization. Negative feedback, indicating failure, means that either (1) implementation will require more time, resources, effort, or thought or (2) the decision was a bad one.

If the decision appears inappropriate, it's back to the drawing board. Then the process cycles back to the first stage redefinition of the problem. The decision-making process begins anew, preferably with more information, new suggestions, and an approach that attempts to eliminate the mistakes made the first time around. 

*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2004, THOMAS A. BATEMAN, SCOTT A. SNELL, PGS. 70-74*

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