Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Decision Making

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
Business Studies

Whenever you see a successful business, someone once made a courageous decision."

- Peter Drucker

In business, decisions are made every day at different levels. These include strategic decisions, managerial decisions, and everyday operational decisions. Business success is highly dependent on the decisions made in the organisation; therefore the decision-making process is very important. The process involves steps that managers can take to find the best option among alternatives.

What are decision trees?

Decision trees are useful decision-making tools used by managers to make important decisions.

Decision trees are flow charts that lay out all possible alternatives, their probabilities, and outcomes, making the decision-making process easier.

It is usually used by managers to make financial decisions. The final decision is made by calculating the expected value and the net gains.

Firstly, all the alternatives for the situation are noted. Then the possible consequences of the alternatives and the probability of their occurrence are noted. You should collect data about the cost and revenue that are associated with each consequence. The cost is represented in brackets “()”, and the rest represent revenue; these are the financial values of the outcome (see figure 1 below).

The financial value (except the cost) multiplied with the corresponding probability of occurrence is the expected value. The total expected value for an alternative is the sum of the expected values of each consequence of the alternative.

Lastly, the net gains are calculated by subtracting the cost from the total expected value. The alternative showing the highest value in net gains will be selected as the best-suited option by the managers.

Decision Making Decision tree, StudySmarterFigure 1. Decision Tree, StudySmarter

Influences on decision-making

Organisations make a variety of decisions including strategic decisions that are usually long-term and tactical that are usually short-term. Decisions are influenced by various internal and external factors in the organisation. The main factors that influence decision making are :

Mission

The business mission communicates the organisation's purpose and intentions. For example, well-known luxury fashion brand Gucci's mission statement is to become the leader in the luxury market at a worldwide level'.1 All decisions that Gucci makes will be influenced by its mission.

Objectives

Objectives assist a business in achieving its mission or aims. For example, if an organisation's objective is to produce a greater quality of products. Then the organisation will focus on looking for suppliers that supply high-quality materials, and ensure that product is produced with care and high quality.

Ethics

Some businesses focus their objectives on profit maximisation some on being ethical. However, it is important for businesses to have some ethical principles such as environmental and social. Or at least be perceived as having them as this will increase consumers' trust in the brand and their loyalty.

The external environment including competition

This is the major factor that influences business decisions, as it has an impact on competition in the market, demand for goods and services, etc. For example, if in the geographical area that business operates in consumers are increasingly interested in health and exercise businesses decisions regarding marketing and new product range will be influenced by this consumer behavior.

Resource constraints

Businesses should always consider the availability of resources as this will impact on business's decision-making. Especially if resources are scarce and limited the business will be considering the opportunity costs. There are two main types of resources:

Financial resources: Availability of financial resources plays a huge part in decision-making. This will determine wherever businesses can expand or invest in technological developments. However, if a business has only limited financial resources it has to make compromises where to allocate the budget, This could be between marketing or investment in facility developments.

Human resources: The availability of a skilled and trained workforce within the organisation or are interested in applying to work for the organisation is crucial. This will influence the way business runs and develops. Alternatively, if there is limited availability of trained and experienced workforce available businesses should make alternative choices of staff training.

What is scientific decision-making?

All decisions include uncertainty and associated risks. Therefore, decision-making is a very crucial process and decision-makers try to avoid uncertainty by basing their decisions on facts and data rather than relying on intuition. This scientific method helps to foresee the results of the decisions made. Scientific decisions help to set the right objectives to achieve a goal and reset them, if necessary, after evaluation.

Scientific decision-making in business is the use of data and evidence to make an informed decision and plan a course of action.

Such data-driven decisions help managers reduce the risk and form an analytical process.

Data collection is the primary and most important step in scientific-decision making and can be collected in various ways for different purposes. Data can be collected by conducting research, performing a conjoint analysis, using existing data, etc.

Scientific decision-making in business helps managers to make the right decisions regarding product innovation (to identify what people need), managerial decisions within the company, reallocation of resources, leadership development, and many such business decisions. Scientific decision-making eliminates the risk of making a biased decision and chooses an action plan that will be most effective and fits the company's desired goals perfectly. Decisions made in this manner help the company to optimise their costs and reach their goal efficiently.

Examples of the use of scientific decision-making in business include decision trees, techniques for investment appraisal - for Annual Recurring Revenue (ARR), Net Present Value (NPV), payback period. It is used for sales forecasting and network analysis. The method is also embedded in algorithms in automation for dynamic pricing of services or goods based on data.

The decision-making model

The decision-making model describes the process of scientific decision-making, which is based on research and data. Therefore this method can be also referred to as a hypothetical decision-making model. Figure 2 shows that the scientific decision-making model involves five steps, which are:

1. Set objectives

The first step of the decision-making process is to set objectives, of what the business aims to achieve within the set time period. Importantly, the set objectives must align with the business's vision and corporate mission statement. For example, the business objectives could be to expand to another country that is cost-effective and have demand for the company's products.

2. Gather data

The following step of the decision-making process is to gather relevant data from trusted internal and external sources in regard to the set objective. This can be done using primary and secondary research methods. For example, the data can involve secondary research can legal information and government statistics to gather data involving costs of starting a business, demand in the area, workforce availability, etc.

3. Analysis of data

The collected data must be analysed to make recommendations for making effective decisions. Data can be analysed using various quantitative tools can be used such as the decision-making trees.

4. Select a strategy / make a decision

This step is when the decision is made in regards to which strategy the business will follow. The made decision will be fully based upon recommendations that have arisen from the previous analysis.

5. Implement and review the decision

This is the final step of the scientific decision-making model. In this step, the business should implement the made decision to its practice. As well as review how well it is working in terms of achieving set objectives. For example, if expanding internationally does not bring a lot of revenue but high operational and export costs, a business must re-examine made decision and see if it may be better to stay nationally or reconsider expanding to a different location.

Decision Making Process StudySmarterFigure 2. The Process of Decision Making, StudySmarter

Role of risks, rewards, uncertainty, and opportunity cost of decision-making

The outcomes of made decisions cannot be 100% predicted, therefore when making decisions businesses cannot avoid risks and other unexpected outcomes. For that reason, to make well-judged decisions businesses need to understand risk, rewards, uncertainty, and opportunity costs that are involved in decision making.

Risk

Risks cannot be avoided in decision-making. The level of risk depends on the scope of the made decision. For example, introducing a new product may involve risks as businesses cannot predict how successful the product will perform in terms of sales and other key performance indicators (KPIs).

Rewards

Every decision that a business makes is expected to bring some sort of benefits and positive outcomes to the organisation. For example, investing in new technology is expected to reduce the costs of production and make the production process more efficient.

Uncertainty

Even if the risk involves high risk and uncertainty it does not mean that businesses should avoid pursuing this decision. As high-risk decisions usually involve higher potential rewards. However, businesses should aim to minimise risk and uncertainty by undertaking research to avoid potential failure. For example, if a business aims to expand internationally to a particular country it should do market research to see if there is a demand for a market, competition in the area, and the country's legal regulations.

Opportunity cost

All decisions involve opportunity costs. Meaning that once making a decision business has to choose among alternatives and evaluate the opportunity costs involved. These are usually measured in regards to scarce resources such as time and money. For example, by expanding internationally a business may gain additional profit however lots of time, effort and costs will be involved in this decision. Alternatively, if businesses remain nationally they may lose on the opportunity to enter a new market however it can avoid additional costs and save time which may bring more profit.

What is intuition-based decision-making?

Intuition-based decision-making or intuitive decision-making is the process of forming a decision or judgment based on information gained from previous experiences or learnings.

When you are put in a situation you have already faced before, your mind subconsciously recalls the patterns or learnings from the previous experience which form the basis of your decision. Intuitive decision-making is making decisions based on your “gut feeling”. It is not a decision-making process that solely relies on emotions or feelings. It is based on logic from the previously acquired information.

What is the role of intuition?

Intuition plays an important role in a rapidly changing environment. It provides you with a fast response and is based on your previous failures and learned lessons. Intuition is the processed information that has been stored in the subconscious mind which helps us form decisions when needed, in the future. It helps you to understand patterns and approach situations with a practical frame of reference. With the acquired knowledge from the past, you can compare the current situation with that of the past and make a decision. It has been scientifically proven that intuition helps us make better and more confident decisions.

What is the role of intuition in decision-making?

The RPD model explains how people make quick, effective decisions when they face a complex situation based on intuition.

People use the experience or knowledge they have gained from a previous similar situation they are currently facing. This leads to “recognition” of the decisions made then, setting a further course of action. Being intuitive can also help us understand the unexpected. When such an unexpected situation presents itself, you seek more information. We then mentally stimulate and possibly modify an action. If this does not work out, you would then consider the next option in mind.

Decision Making RDP Model StudySmarterThe RDP Model, StudySmarter

Decision making - key takeaways

  • Decisions are made at different levels: strategic, managerial, and everyday operational.
  • Decision trees are flow charts that lay out all possible alternatives, their probabilities, and outcomes, making the decision-making process easier.
  • The main factors that influence decision-making are mission, objectives, ethics, the external environment including competition, and resource constraints.
  • Scientific decision-making can be defined as the scientific process of making decisions based on evidence and data by adopting a systematic approach, instead of decisions based on intuition or trial-and-error.
  • Scientific decision-making helps managers make an informed decision to reduce the consequent risks associated with the decision.
  • The method of scientific decision-making includes five steps: 1) Set objectives 2) Gather data 3) Analyse data 4) Select strategy / make a decision 5) Implement and review the decision
  • Scientific decision-making in business is the use of data and evidence to make an informed decision and plan a course of action.
  • Prior to making decisions businesses need to consider risk, rewards, uncertainty, and opportunity cost.
  • Decision making or judgment based on information acquired from learning, experience, and/or when stored in long-term memory is accessed unconsciously is called intuition decision-making.
  • Intuition-based decision-making or intuitive decision-making is the process of forming a decision or judgment based on information gained from previous experiences or learnings.

Decision Making

Decision-making is a process that managers take to find the best option among alternatives for problem-solving and accomplishing business objectives.

Using the seven-step decision making process model. First, the decision-makers identify a problem. Then they gather relevant information and identify alternative solutions. The decision will be made depending on which alternative is estimated to bring the most benefits. Once a decision is made, it must be evaluated to see to what extent it was effective. This information will be helpful for future reference to avoid making the same mistakes and be aware of successful decisions.

The seven stages of the scientific decision-making process are:

 1) Identification of a problem

 2) Information gathering

 3) Identification of alternatives

 4) Evaluation of alternatives 

5) Choosing among alternatives

 6) Decision implementation 7) Evaluation of the decision.

 Decision-making in management has different levels: strategic decisions, managerial decisions, and everyday operational decisions.

Scientific decision-making can be defined as the scientific process of making decisions based on evidence and data by adopting a systematic approach, instead of decisions based on intuition or trial-and-error.

The scientific decision-making method helps organisations in many ways such as the following:

  1. Clear direction – the method provides a clear sense of direction as all the steps to achieve the goal are discussed during the decision-making process. 
  2. Cost-saving  – scientific decision-making helps to realize cost-savings as companies start to make informed decisions, which increases the operational efficiency, thereby resulting in cost-saving. 
  3. Unbiased decision-making – this method aids in generating unbiased, and rational decisions as all the decisions are based on data, increasing the probability of success. 
  4. Confident decision-making – once you start analysing data and understand what they mean, you will be able to make more confident decisions, as data is local and concrete. This confidence helps you and your company to fully commit to a task.
  5. Continuous evaluation – the processes are continually monitored, which helps to evaluate each step and understand if the company is moving towards the goal or away from it.
  6.  Proactive – although the scientific decision-making process is reactive in nature, with practice and the right data, the company can leverage it in a proactive manner – such as to identify threats or opportunities before competitors. 


 Decision-making is important as it helps managers to make informed decisions based on existing data or collected data. Such informed decisions help to anticipate future outcomes and associated risks. It helps you analyze all the possibilities and choose the one that best fits your company goal. This method is ideal to make rational decisions, as the subjective element of decision-making is removed and the data on which we base our decisions are logical and concrete.

Intuitive decision-making based on learnings from experience, and/or when stored in long-term memory is accessed unconsciously is called intuition decision-making. Intuitive decision-making is making decisions based on your “gut feeling” and patterns from the past. It is based on logic from the previously acquired information.

 Intuition-based decision-making or intuitive decision-making is the process of forming a decision or judgment based on information gained from previous experiences or learnings. When you are put in a situation you have already faced before, your mind subconsciously recalls the patterns or learnings from the previous experience which form the basis of your decision. Intuitive decision-making is making decisions based on your “gut feeling”. It is not a decision-making process that solely relies on emotions or feelings, but also logic from the stored information. 

Intuitions help you make more creative and effective decisions. You can make even better intuitive decisions by improving your intuition, and trusting your gut. Making better intuition-based decision-making will occur over time as the company puts this practice to use. Gaining more experience and learning from past mistakes is very essential in making better decisions. 

Intuition is the knowledge about something that you gain from an experience that is stored in your subconscious and is accessed when necessary without deliberation. 

Final Decision Making Quiz

Question

 What are the decision trees?

Show answer

Answer

Decision trees are flow charts that lay out all possible alternatives, their probabilities, and outcomes to make the decision-making process easier.

Show question

Question

 Who uses decision trees and for what purpose?

Show answer

Answer

Decision trees are used by managers to make financial decisions.

Show question

Question

When are scientific decision-making methods applied?

Show answer

Answer

 Scientific decision-making methods are used for the use of scientific decision-making in business include decision trees, techniques for investment appraisal - for Annual Recurring Revenue (ARR), Net Present Value (NPV), payback period. It is used for sales forecasting, and network analysis. The method is also embedded in algorithms in automation for dynamic pricing of services or goods based on data.

Show question

Question

What is the difference between step 4 - Choosing among alternatives and step 5 - Decision implementation in the decision-making process?

Show answer

Answer

The main differences between these two steps are that step 4 involves the decision-maker making a decision based on analyses that were carried out in the previous step. On the other hand, step 5 is an action-based step in which a decision will be put into practice in reviewing how well it helps businesses to achieve set objectives.


Show question

Question

Define intuition-based decision-making.

Show answer

Answer

Decision making or judgment based on information acquired from learning, experience, and/or when stored in long-term memory is accessed unconsciously is called intuition decision-making.  

Show question

Question

What is the role of intuition?

Show answer

Answer

 It helps you to understand patterns and approach situations with a practical frame of reference. With the acquired knowledge from the past, you can compare the current situation with that of the past and make a decision. It has been scientifically proven that intuition helps us make better and confident decisions.

Show question

Question

What is the primary factor for making intuitive decisions?

Show answer

Answer

Experience is the primary factor for making intuitive decisions.

Show question

Question

What is the RPD model?

Show answer

Answer

The RPD model explains how people can make good decisions in difficult or unfamiliar situations. It offers a new perspective of evaluating alternatives. This model is a mix of intuitive and analytical processes.

Show question

Question

Name the different steps of scientific decision-making.


Show answer

Answer

1) Set objectives 2) Gather data 3) Analyse data 4) Select strategy/ make a decision 5) Implement and review the decision.

Show question

Question

What is Framing?

Show answer

Answer

Framing is a way of understanding our problems based on our understanding of things, ideologies, media exposure, and many other factors. They shape the way we think and help us generate a decision. Framing may bring about irrational decisions.

Show question

Question

Which of the following explains arbitrage, unfair competition, and loss aversion in firms?

Show answer

Answer

Heuristics

Show question

Question

What is the primary and most important step of scientific decision-making?


Show answer

Answer

Data collection is the primary and most important step of scientific decision-making.

Show question

Question

Name 3 steps that will help a company become more data-driven.


Show answer

Answer

Analyzing and understanding patterns, non-reliance on gut feelings, and familiarization of techniques will help a company become more data-driven.

Show question

Question

What type of factors decisions are influenced by?

Show answer

Answer

 Internal and external

Show question

Question

What are the main factors that influence decision making?


Show answer

Answer

The main factors that influence decision making are:

  • Mission

  • Objectives

  • Ethics

  • The external environment including competition

  • Resource constraints

Show question

Question

What are the two main types of resources businesses should consider when making decisions?


Show answer

Answer

Businesses should consider two types of resources which are financial and human resources.

Show question

Question

Why businesses should consider ethics when making decisions?


Show answer

Answer

Businesses should be concerned about ethics because recently consumers are increasingly concerned about it. Therefore, if the business is not ethical consumers may not want to continue to be loyal customers to the business. Due to this, when making decisions businesses must consider ethical aspects or at least be perceived as ethical by consumers.

Show question

Question

What factors do businesses need to understand before making decisions?

Show answer

Answer

The main factors that businesses should understand prior decision making are:

  1. Risk

  2. Rewards

  3. Uncertainty

  4. Opportunity cost

Show question

Question

Why do businesses need to understand opportunity costs when making decisions?


Show answer

Answer

Businesses need to understand opportunity cost prior to decision making as it will help to evaluate which alternative will give the best opportunity.

Show question

Question

What is meant by Heuristics?

Show answer

Answer

Heuristics are cognitive biases that help you make quicker decisions and focus your mind on one aspect of the problem than another. This method is not perfect for making the optimal or rational decision but helps in reaching short-term goals. 


Show question

Question

Flow charts that lay out all possible alternatives, their probabilities, and outcomes, making the decision-making process easier are called...

Show answer

Answer

decision trees.

Show question

Question

This model explains how people make quick, effective decisions when they face a complex situation based on intuition. What model it is?

Show answer

Answer

The RDP Model

Show question

Question

Intuition-based decision-making is also called...


Show answer

Answer

intuitive decision-making.

Show question

Question

This type of decision making makes use of data and evidence to make an informed decision and plan a course of action. What is it?

Show answer

Answer

Scientific decision-making

Show question

Question

What is the first step in the decision-making model?

Show answer

Answer

Set objectives

Show question

60%

of the users don't pass the Decision Making quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.