Every business and government are making decisions on a daily basis. These decisions are affecting customers, employees, environment and all society. So, to make appropriate decisions they commonly use some framework. Now I want to show you six steps in decision-making which are fundamental for that frameworks.
Step 1: Define the Problem
What is the problem the manager faces? Who is the decision, maker? What is the decision setting or context, and how does it influence managerial objectives or options?
Decisions do not occur in a vacuum. Many come about as part of the firm’s planning process. Others are prompted by new opportunities or new problems. It is natural to ask, what brought about the need for the decision? What is the decision all about? In each of the examples given earlier, the decision problem is stated and is reasonably well defined. In practice, however, managerial decisions do not come so neatly packaged; rather, they are messy and poorly defined. Thus, problem definition is a prerequisite for problem management.
Step 2: Determine the Objective
What is the decision maker’s goal? How should the decision maker value outcomes with respect to this goal? What if he or she is pursuing multiple, conflicting objectives? When it comes to economic decisions, it is a truism that “you can’t always get what you want.”2 But to make any progress at all in your choice, you have to know what you want. In most private-sector decisions, profit is the principal objective of the firm and the usual barometer of its performance. Thus, among alternative courses of action, the manager will select the one that will maximize the profit of the firm. Attainment of maximum profit worldwide is the natural objective of the multinational carmaker, the drug company, and the management and shareholders of Barnes & Noble, Borders Group, BP,
NBC, and CBS. The objective in a public-sector decision, whether it be building a bridge
or regulating a utility, is broader than the private-sector profit standard. The government decision maker should weigh all benefits and costs, not solely revenues and expenses.
What are the alternative courses of action? What are the variables under the decision maker’s control? What constraints limit the choice of options? After addressing the question “What do we want?” it is natural to ask, “What are our options?” Given human limitations, decision-makers cannot hope to identify and evaluate all possible options. Still, one would hope that attractive options would not be overlooked or, if discovered, not mistakenly dismissed. Moreover, a sound decision framework should be able to uncover options in the course of the analysis.
Step 4: Predict the Consequences
What are the consequences of each alternative action? Should conditions change, how would this affect outcomes? If outcomes are uncertain, what is the likelihood of each? Can better information be acquired to predict outcomes? Depending on the situation, the task of predicting the consequences may be straightforward or formidable. Sometimes elementary arithmetic suffices. For instance, the simplest profit calculation requires only subtracting costs from revenues. The choice between two safety programs might be made according to which saves the greater number of lives per dollar expended. Here the use of arithmetic division is the key to identifying the preferred alternative.
Step 5: Make a Choice
After all the analysis is done, what is the preferred course of action? For obvious reasons, this step (along with step 4) occupies the lion’s share of the analysis and discussion in this book. Once the decision maker has put the problem in context, formalized key objectives, and identified available alternatives, how does he or she go about finding a preferred course of action?Step 6: Perform Sensitivity Analysis
What features of the problem determine the optimal choice of action? How does the optimal decision change if conditions in the problem are altered? Is the choice sensitive to key economic variables about which the decision makers uncertain? In tackling and solving a decision problem, it is important to understand and be able to explain to others the “why” of your decision. The solution, after all, did not come out of thin air. It depended on your stated objectives, the way you structured the problem (including the set of options you considered), and your method of predicting outcomes. Thus, sensitivity analysis considers how an optimal decision is affected if key economic facts or conditions vary.
