Decision

Making
Dynamics Prepared by: S. Gardner
Of Decision
Making
 LEARNING OBJECTIVES
At the end of this chapter students should be able
to:
▪ Understand the nature of decision making
▪ Discuss the essential features of the information
used to make decisions
▪ Discuss the different stages of the decision-
making process
▪ Identify the factors that affect decision making
▪ Differentiate between qualitative and quantitative
decision making
DECISION MAKING
• Decision making is the act of choosing between two
or more alternatives.
• Decisions have to be made on which product to
invest in, which supplier to buy from, who to employ
and how to raise capital, among other things.
 LEVELS OF DECISION MAKING
• Strategic level – long-term decisions that entail high risks and
are usually made by top management. Strategic decisions
influence the direction, overall policy and performance of the
business (for example, building a new plant or entering a new
market)
• Tactical level – short- to medium-term decisions that are
usually made at the middle management level. They carry
fewer risks and would involve decisions such as what price to
charge, which supplier to purchase from and who to employ
or make redundant.
 LEVELS OF DECISION MAKING
(CONT’D)
• Operational level – short-term decisions that deal with the
administration of the firm’s strategic and tactical decisions.
They involve few risks and can be made quickly. At this level,
decisions such as which credit limit can be offered to a
customer or on the ordering of stationery are made.
 FEATURES OF INFORMATION
Any information collected must have four essential features
which can be summarised using the acronym ‘CART’, broken
down into:
Cost effectiveness – the cost of gathering the information should
not outweigh its benefits. The information should be gathered in
the least costly way while maintaining its accuracy and relevance
Accuracy – information collected must be accurate so that it can
be relied upon by the manager. Misleading information may
impede the decision being made and results in undue cost to the
firm
 FEATURES OF INFORMATION
(CONT’D)
Relevance – the information collected must be appropriate for
the situation or decision being made. It must be up to date, as
out-dated information is useless.
Timeliness – information must be available to managers and
other decision makers on time. It should be obtained in a timely
manner, since failure to do so may lead to bad decisions.
QUALITATIVE VERSUS
QUANTITATIVE DECISION MAKING
There are two forms of decisions that firms make which are
based on the resources that are consulted. These are qualitative
and quantitative decision making.
❖ A qualitative decision is one that is made based on non-
quantifiable information. These decisions often entail people’s
value judgements and opinions. Firms embarking on
qualitative decision making may make use of the ‘SWOT’
analysis (Strengths, Weaknesses, Opportunities and Threats)
and ‘PEST’ analysis (Political, Economic, Social and
Technological factors). These decisions tend to be very
subjective since they are not based on statistical data.
QUALITATIVE VERSUS
QUANTITATIVE DECISION MAKING
(CONT’D)
❖ In contrast, a quantitative decision is one based on statistical
data. Unlike qualitative decisions, quantitative decisions rely
on historical data that can be quantified and analysed to make
generalisations and draw conclusions. Quantitative decisions
could be based on information gathered from sources such as
market research, historical sales figures and accounting
information.
THE STAGES OF DECISION MAKING
1. Definition of problem or opportunity - The first step of the
decision-making process is to identify the problem to be solved
or the objective to be achieved. The problem may be identified
by thoroughly searching through the firm’s annual reports or
financial statements or from customers’ feedback, among other
sources. When the problem is identified, it is imperative that it is
clearly defined so as to prevent the business from going in the
wrong direction. Problems that are unambiguous will save time
and possibly cost. For example, a firm may want to ascertain why
its sales revenue has fallen over the past two years. The firm
could also outline the objective(s) it wants to achieve at the end
of this process.
THE STAGES OF DECISION MAKING (CONT’D)
2. Data collection - Having identified the problem, the firm must
now decide how and from what sources the data will be
collected. The data needed may be collected from primary and/
or secondary sources. ‘Primary data’ refers to original
information collected specifically in response to the problem.
This may be collected through observation, interviews and
questionnaires. Primary data must be collated and analysed in
order to have some value based on the problem defined in the
first stage. ‘Secondary data’ represents information collected
from other sources, such as newspapers, textbooks, internet
sources or other work of a similar nature that was compiled for
previous research.
THE STAGES OF DECISION MAKING (CONT’D)

3. Developing alternatives - After collecting sufficient data, the

next step is to develop a list of possible actions that can be
taken. These options may be developed individually, by teams or
through analysis of similar situations in comparable
organisations. These alternatives should be geared toward
solving the problem or achieving the objective outlined above.
Having formulated the possible alternatives, the manager can
then move to the other stages.
THE STAGES OF DECISION MAKING (CONT’D)

4. Analysing the alternatives - Using the list of alternatives,

management should analyse the practicality and
appropriateness of each alternative. An alternative may be
deemed impractical because of:
- Lack of financial resources
- Lack of expertise to implement the alternative
- Legal restrictions
- Ethical and social responsibility implications
- Technological constraints
- Insufficient information.
THE STAGES OF DECISION MAKING (CONT’D)

4. Analysing the alternatives (cont’d)

To assess the appropriateness of an alternative, the decision
maker should consider its adequacy to address the problem. The
decision maker should also consider the costs or benefits of
choosing each alternative. This should include the possible
impact that each option will have on the defined problem and
the entire organisation.
THE STAGES OF DECISION MAKING (CONT’D)
5. Selecting and implementing the alternative - Here, the
decision maker selects the best course of action to solve the
problem. As we examine this stage, you will realise that many
situations do not lend themselves to mathematical or
quantitative analysis but instead are subjective. However, there
are some situations where sufficient quantitative data is present
to aid in the selection of a particular alternative. The manager
may also select and use a combination of options instead of one.
Once selected, the option(s) should be implemented in the least
costly way feasible. It is also possible that management may
encounter unforeseen problems and face resistance to change
from employees.
THE STAGES OF DECISION MAKING (CONT’D)
6. Evaluation - The final stage is the evaluation of the option(s)
that were implemented above. Here, the decision maker needs
to evaluate the outcome of the decision taken. These results are
then compared with the original objectives or problem to
ascertain whether they were achieved or solved. The results are
often presented in a report. Having assessed the report, it may
be necessary to modify the course of action or to start the
process of decision making over again.
FACTORS AFFECTING DECISION MAKING
• Government, political and legal - The government is
responsible for passing various laws and requirements and
establishing frameworks that will affect decision making.
Since political parties have different philosophies and goals,
a change in administration may also pose a problem for
some businesses. The macroeconomic policies that will be
pursued might differ and this will have some influence on
businesses. The legal environment of the Caribbean is
becoming even more pressing, with the signing of a regional
treaty to form the Caribbean Single Market and Economy
(CSME).
FACTORS AFFECTING DECISION MAKING
• Government, political and legal (cont’d)
In the Caribbean there are currently a number of laws
governing the behaviour and operation of businesses. These
include:
- Employment laws which govern contracts, recruitment,
termination of employment, redundancy, health and safety in
the workplace, unionisation, dispute resolution and minimum
wage payments. Businesses must be aware of these laws when
making decisions since they have serious implications for them.
FACTORS AFFECTING DECISION MAKING
• Government, political and legal (cont’d)
- Laws to promote competition in business. Governments
have enacted laws revoking previous monopoly licences and
liberating some of these markets in order to foster
competition. These laws may also prevent mergers and limit
uncompetitive practices among firms. For example, the
Jamaican telecommunications market was liberalised in 2001
to allow other firms to enter the industry. A number of other
Caribbean territories have also liberated their
telecommunication markets.
FACTORS AFFECTING DECISION MAKING
• Government, political and legal (cont’d)
- Consumer rights which protect consumers from exploitation
and unfair practice in business. In Jamaica, consumers may
obtain redress from the Consumer Affairs Commission, the
Bureau of Standards and the Fair Trading Commission, while
landlords and tenants are protected and governed by the
Rent Board. The Sale of Goods Act is also important, as it
stipulates the conditions under which goods are sold.
FACTORS AFFECTING DECISION MAKING
• Government, political and legal (cont’d)
- Environmental laws. With the emphasis that is being placed
on global warming in recent times, firms now have to be
more careful about their impact on the environment.
Governments are also becoming more vigilant in the
enforcement of environmental protection laws. For example,
firms in the food services industry have to be mindful of
offseason fishing and other firms have to limit their pollution
of the air, water or land.
FACTORS AFFECTING DECISION MAKING
• Social and cultural - With some governments passing
environmental and animal protection laws and the impact of
global warming being felt around the world, businesses must
now be more aware of these factors in their decision
making. They must also be aware of the culture of the
market in which they are entering or operating. ‘Culture’ is
defined as a combination of beliefs, values, rituals and
practices that shape one’s behaviour over time. Culture plays
a critical role in some markets in terms of food, dress and
music. In business, the decision maker must be aware of this
and guide his/her decision likewise.
FACTORS AFFECTING DECISION MAKING
• Social and cultural (cont’d)
Decision makers need to be conscious of the following factors
in society:
❑ Changing family structure – there are a number of single-
parent households in many Caribbean territories and the
number keeps growing. Management must be mindful of
this trend, in addition to the existence of nuclear and
extended families, and try to ascertain how any decision
made will affect each structure. The decision maker must be
aware of families’ range of income, and the products that
they demand. He/she must be mindful that the family
structure can affect the level of poverty or give an indication
of how the firm should price its product.
FACTORS AFFECTING DECISION MAKING
• Social and cultural (cont’d)
❑ Improvement in education – Caribbean territories are now
open to a number of tertiary institutions and the number of
people achieving higher education has grown remarkably.
These people will question a firm’s decision and action
before purchasing their products.
❑ Population age and working habits – the age of the
population is influenced by the life expectancy rate, which
has increased over the years as a result of healthier lifestyle
and developments in medicine. With investment
opportunities increasing, some people are retiring earlier
and this is compounded by the fact that they are generally
living longer.
FACTORS AFFECTING DECISION MAKING
• Technological - Technology has evolved rapidly in the past
two decades. Computers have been reduced in size
significantly; the internet has opened up a myriad of
opportunities; there is new and improved technology in
manufacture that has reduced wastage and improved yield;
and there are a number of social networks that bring
together people from all over the world. Decision makers
need to be aware of the pros and cons of technology and
capitalise on the opportunities it brings while being mindful
of its threats. The world has become a global marketplace
and firms are faced with competition from all over the world.
 FACTORS AFFECTING DECISION MAKING
• Technological (cont’d) - E-commerce has grown considerably
and firms in the Caribbean may have to compete with others
in Europe or Asia. The banking sector is one such industry
that has made strides in incorporating and utilising
improvement in technology in the delivery of its services. E-
banking has given customers freedom to pay bills, transfer
funds and check account balances, among other things.
Decision makers must assess how the changes in technology
will affect decisions made. The proliferation of social
networks in recent times has provided firms with a new
medium to promote their products and gain customer
feedback.
 FACTORS AFFECTING DECISION MAKING
• Economic - Economics is a social science which deals with
study of human behaviour and how scarce resources are
allocated to satisfy human beings’ unlimited wants. We all
make economic decisions on a daily basis and these decisions
may be influenced by different forces in the economy. The
government has to make macroeconomic decisions which will
impact on the business community. These macroeconomic
policies may aid or discourage business and decision makers
must be aware of this. Macroeconomics deals with economic
aggregates – in other words, it is the study of the economy as a
whole. Macroeconomics policies include such things as
inflation, the unemployment rate, interest rates, exchange
rates, economic growth and the balance of payments.
 FACTORS AFFECTING DECISION MAKING
❖ Inflation rate - Inflation is a continuous or sustained increase in
the general price level in an economy. High inflation rates may
cause an increase in production cost for firms. It will also mean
that revenue will lose its value as inflation rates get higher. In
addition, the purchasing power of consumers will decrease as
they will not be able to purchase the same amount of goods
and services with the same income as before. Inflation is
calculated as:

Where t = present year and t–1 = previous year.

 FACTORS AFFECTING DECISION MAKING
❖ Inflation rate (cont’d) - There are two main causes of inflation:
✔ Demand pull inflation – this is commonly referred to as ‘too
much money chasing too few goods’. It occurs where aggregate
(total) demand is increasing while the available output of goods
or services is limited. The excess demand will cause the general
price level to increase.
✔ Cost push inflation – occurs when the price of inputs into
production increases and causes producers to increase the
price to consumers. This type of inflation is influenced by three
main factors, including wage push factor, import price push and
profit push.
 FACTORS AFFECTING DECISION MAKING
❖ Unemployment rate - The unemployment rate measures the
percentage of the population between the ages of 18 and 65
that are currently not working but actively seeking
employment. This is calculated as:

Labour force consists of Employed + Unemployed people.

 FACTORS AFFECTING DECISION MAKING
❖ Unemployment rate (cont’d) - There are four main types of
unemployment, namely:
✔ Frictional – this type of unemployment is as a result of the
search process when people are between jobs. For the period
of time that they are out of a job or waiting to find another job,
they are referred to as being ‘frictional unemployed’
✔ Cyclical – this is caused by the recessional phase of the
business cycle. When total demand falls, firms tend to employ
fewer people and the unemployment rate will increase.
 FACTORS AFFECTING DECISION MAKING
❖ Unemployment rate (cont’d) –
✔ Structural – this is caused by changes in technology or the
structure of the organisation. As a result, some skills are no
longer needed or people lack sufficient skills to secure
employment
✔ Seasonal – unemployment that is as a result of the off-season
period of production. This is evident in the agricultural industry
in the Caribbean, as some workers are laid off when the crop
season ends and then reemployed when it starts again.
 FACTORS AFFECTING DECISION MAKING
❖ Interest rate - Interest rate is the amount that borrowers pay to
lenders per dollar of the money borrowed. In other words,
interest is the price paid for the use of money or for the use of
capital. The level of interest rates is very important to
management. Very high interest rates will impede growth, as
the cost of borrowing money will be too high. Firms will not be
able to borrow to invest and, without additional investment,
businesses will not grow. The government’s macroeconomic
policy on interest rate may hinder or enhance the business
environment and decision makers must be aware of this.
Interest rates may vary for a number of reasons, such as the
length of the loan, the risk involved and administrative charges.
 FACTORS AFFECTING DECISION MAKING
❖ Exchange rate - The rate at which one country’s currency
trades for another is known as the exchange rate. The
exchange rate for these countries ranges from low to high,
depending on the territory in question. High exchange rates
may hurt businesses which import most of their inputs into
production. Low exchange rates hurt exporters who will receive
lower return on their products when revenue is converted in
their local currency. Countries in the Caribbean use one of the
two main types of exchange rate systems. For example,
Barbados has a fixed exchange rate system, while Jamaica has a
managed floating exchange rate system.
 FACTORS AFFECTING DECISION MAKING
❖ Exchange rate (cont’d) - A fixed exchange rate system is one
where the government fixes the external value of its currency
in relation to other currencies – for example, at $2 Barbados to
$1 United States (BD$2:US$1). The rate is maintained by the
Central Bank which intervenes in the foreign exchange market
by supplying US dollars when there is a shortage and
purchasing excess currency when there is a surplus. The
opposite of this is a floating exchange rate system where the
value of the currency is determined freely by the interaction of
demand and supply of the dollar.
 FACTORS AFFECTING DECISION MAKING
❖ Exchange rate (cont’d) - A fixed exchange rate system is one
where the government fixes the external value of its currency
in relation to other currencies – for example, at $2 Barbados to
$1 United States (BD$2:US$1). The rate is maintained by the
Central Bank which intervenes in the foreign exchange market
by supplying US dollars when there is a shortage and
purchasing excess currency when there is a surplus. The
opposite of this is a floating exchange rate system where the
value of the currency is determined freely by the interaction of
demand and supply of the dollar.
 FACTORS AFFECTING DECISION MAKING
• Ecological Factors - Ecology is the study of living organisms
and their environment. Ecological or environmental factors deal
with how businesses treat the environment in which they
operate. Businesses are being urged to be more socially
responsible and laws have been enacted to monitor their
behaviour. For example, there are laws prohibiting firms from
dumping their wastes inappropriately, cutting down large
numbers of trees and damaging coastlines. Decision makers
must be aware of the implications of making decisions that are
bad for our environment. The degradation of the environment
has serious implications for the region’s agricultural industry
and has the potential to create food shortages whenever a
major disaster hits.
 FACTORS AFFECTING DECISION MAKING
• Human and natural constraints - The human element in
business may pose different challenges. The fact is that we are
all different in thought, ability and attitude. The decision maker
should be aware of the following factors:
- The skill level of employees, which may foster or hinder the
implementation of certain decisions
- The years of experience of both management and staff
- People have different attitudes to risk and change. Some
employees may not like change, while some might be more
cautious than others in terms of risk taking
- Size and composition of the labour force is also vital
- The level of motivation of the workforce.
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