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What should managers do to face the challenging fast-changing business environment

We live in an economic world where human wants are unlimited, unfortunately the resources available to satisfy these wants are limited. Given the scarcity of available economic resources, management becomes a very important tool regarding decision making within an organisation. Management is a distinctive role where we create managers who are different from those doing the work (Boddy, 2013). Management is “the attainment of organizational goals in an effective manner through planning, organizing, leading and controlling organizational resources” (Daft, et al 2013 p.7), Its task is to make sure that economic resources are productive (Drucker, 2013). The role of managers, However,  is becoming more complex with each passing day because of the fast-changing business environment. “Recent years have brought rapid changes in information technology, a new global economic order, new regional powers and much more” (Ossama & Muhittin, 1998 cited in Al-Tarawneh, 2012, p2). “All these changes have presented, on the one hand, a very dynamic world of increased population, inflation, and social consumption, and on the other hand limited scarce resources “(Al-Tarawneh, 2012 p.2). Such conditions are due to the fact that as the level of modernity increases, human needs and want change, leading to change in demand; as a result, managers need to use different strategies to challenge the new environment. Fortunately, decision-making models have been defined to help managers tackle these drastic changes. Over the last 4 year, my practical experiences in different companies and working on a different project has helped me to understand the importance of decision-making models. Their aim is to help managers make the right decisions regarding how they allocate resources. Various decision-making models or theories have been defined to help efficiently solve problems within organizations. Specifically, in this blog, I will try to explain the fast-changing business environment and how this influences decision-making. To do so, I will define the factors leading to the changes in the business environment in greater detail. Then Several decision-making models will be evaluated. These include how they help managers to face changes. Finally, I shall outline the limits of these models in helping managers.

 

The factors leading to the changes in business environment greater detail

The business environment is experiencing a period of fast, complex change, with one of the biggest factors of this change is globalization. According to Morrison (2006), managers and businesses can no longer isolate themselves from international forces as the new global economic order is changing the way businesses work. The development of international exchanges is an increasingly widespread source of competition and are some of the most immediately visible changes.

 

In addition, the current socio-economic environment is changing; the unstable and complex environment is now characterized as an economy of the demand, where the customers no longer buy what the company wants to sell them because they have become demanding and unfaithful. And since informed consumers have a low tolerance for poor quality in product and service  (Coyle, et al 2003), companies use all kinds of strategies to satisfy these “king clients”. Furthermore, advances in technology, which is subject to permanent surveillance, are leading companies to innovate, which has become essential to the competitiveness of an enterprise to the point where it can lead to the disappearance of some companies.

 

In short, the complexity and turbulence of the business environment mean that successful companies today are those who are attentive to their market and are able to adapt quickly to the evolution of a market. For example, Daimler-Benz and Chrysler failed to ally in 1998 because they were unable to anticipate and drive the cultural and human changes (Weber and Camerer, 2003). It is also because it failed to take the digital image shift early enough that Kodak faced major difficulties in the 1990s, forcing it to close down many factories and laboratories. Consequently, this fast-changing business environment requires managers to use strategies in order to ensure their businesses survive. But how to make the right decision?

 

How can managers make sure they are making the right decision?

According to Zoran Jovanović ( 2015, p.144), “managers, in many cases, fail to anticipate or adequately respond to changes”, because they either simply do not see in advance the change, or even if they become aware of the change, they fail to interpret it correctly and, as a result, are harmed by the changes that they could not react well to.

The effective use of decision-making models

To avoid being harmed by changes in their business environments,  managers can use decision-making models that best fit their organisation. Decision making, according to Pride (et al 2009  p.179) is “ the act of choosing one alternative from a set of alternatives”. Meaning that decision-making consists of choosing the alternative that leads to the enterprise’s success. Organizations are places of decision-making: each company directs its activity with multiple decisions of unequal importance. In order to reach the set objectives, managers devote substantial efforts to making appropriate organizational decisions. “Many important theorists and practitioners consider decision-making to be the most critical, core managerial function” (Al-Tarawneh, H. 2012, p.2) because organizations thrive or fall with the decisions made. But decision-making is a very complex process of interdependent and interlinked procedures which consume the decision makers time and money at every stage. Body (2011) highlighted the iterative nature of decision making as illustrated by the figure below:

The iterative nature of the decision-making process is shown by the arrows as we move forward and back. During the process, we come back to the previous step if we find information that requires us to rethink the decisions we have already made. Body (2013 p.193) says that “ People may miss a stage, or give too much attention to one topic and too little to others. Giving just enough time to each stage is a decision-making skill.” In other words, decision-making is a repetition of a sequence of actions and giving the right amount of time and resource to each stage highlights how good the decision maker is. Four different decision-making models have been thought up to help managers make better decisions with more validity and efficiency.

 

  • The Rational Model

 

First is the rational model. Characterized as a computational strategy, it is based on economic assumptions (maximizing shareholders wealth). According to David Boddy (2013), “the assumption underlying this model is that the decision makers aim for goals that are known and agreed”. In plain English, the rational model is logical and linear, all consequences for each possible strategy are identified and evaluated, and the chosen solution is optimal. This model aims to minimize uncertainty and risk. As its name indicates, it is based on rationality and rationality consists of making coherent choices that carry values, within the limits of the constraints. The model defines the behaviour to adopt in order to favour the desired result.

Today, developments in technology enable computers to make some rational decisions using artificial intelligence. This model is mostly used in financial industries such as banks, and insurance companies ( David Boddy, 2013).

 

  • The Administrative Model

 

The second model is the administrative model (Simon, 1967). This model aims to describe how managers make decisions in situations which are uncertain and ambiguous. It is very important for managers because “most managerial problems are unstructured and not suitable for the precise quantitative analysis implied by the rational model” ( David Boddy 2013). It presents the rationality that managers have limited capacities, therefore, managers do not aim for maximisation but for an acceptable outcome. This model is more realistic because managers can not know all the possible consequences of all possible choices, and objectively assess these consequences. It assumes that it is impossible for actors to maximize their utility because it’s hard to deal with uncertainty, the available information is limited, and managers have limited information processing capabilities, and are in situations of strategic interdependence. Consequently, the decision will not be perfect, but satisfactory. It will be the result of the exploration, through a sequential process, of a limited number of alternatives within the set of possible alternatives. The search for empirical solutions, satisfactory and not optimal, characterizes this model of decision-making.

 

  • The Political Model

 

The third model is the political model. This model recognizes that decision-makers can have their own projects, needs, and perceptions; therefore, the decision process becomes a cycle of bargaining and negotiation between decision makers. It is based on incomplete information, distorted or hidden by decision makers to carry out their own projects. This model is a good representation of how the real world works and can help resolve conflicts.

 

  • The Garbage Can

 

The last model is the Garbage Can, which is best described as organized anarchy. For March and Simon, (1993), “organized anarchy” in an organization satisfies the following four characteristics: no real coherent goals shared by all, poor production, members participate intermittently and with varying activity in the various decision-making processes that affect the entire organization. In organized anarchy, decision-making responds to the garbage can model and decisions come from a link between a flow of problems, a flow of solutions and a flow of participation. Decision-making is equated with a basket, in which decision-makers throw questions, solutions, and problems as they emerge, where They are waiting to be treated and are not necessarily connected to each other. Thus, solutions wait until the corresponding problems emerge, and questions wait for the right answer. It is the chance concordance between a question and an answer, between a solution and a problem, that offers the opportunity to make a decision.

This coincidence occurs haphazardly, unforeseen, with decision-makers seizing the opportunity. In this way, decisions can be made inadvertently or by moving a problem to coincide with a solution, but rarely during a planned and deliberate problem-solving process.

 

The importance of decision-making models

All the models mentioned above help the managers efficiently make decisions according to the type of problem they face. Decision-making models are approaches that lead managers through decision-making processes, but it is the manager’s role to make sure they choose the right model and respect the structure of these models, because usually managers, when faced with complex problems, often tend to make a number of mistakes: seeking solutions without understanding the problem; focusing on a small inconsequential problem; trying to solve problems that they can not control; choosing to apply solutions that would cost more than the problem itself; adopting an action plan without putting monitoring tools in place. Decision-making models help prevent these issues, with each of the models helping managers in certain ways. According to McKinsey ( 2014) “Combining vast amounts of data and increasingly sophisticated algorithms, the models of decision making have opened up new pathways for improving corporate performance ”. Another example showing the importance of using a model to make a decision is the case of Esquel Group (2005), a privately owned textile manufacturer based in Hong Kong. In the dilemma of whether or not to invest  $150 million in a brand-new fabric mill that would be the best mill in China and could make Esquel the top shirtmaker in the world, many executives believed building the factory was too risky and that Yang should wait some years until the industry settled down and trends are clearer ( class case study, 2017). The decision was rational because building the factory would be beneficial in the long run, but in the short-run, profits were sure to suffer a lot and the risks to go bankrupt was high. So weighing the pros and cons made realized that it should be better to wait.

 

Limits of Decision Making Models

However, decision-making models are not perfect. For example, the rational model, based on the idea that the rationality of economic calculations, allows one to develop formalizations using mathematical tools and quantitative techniques, which, while useful in the case of well-structured and repeated problems, only apply when questions posed are normative and non-explanatory. Do they answer questions like how to do? Rather than questions like how this choice has been made? Or why did that happen? Sometimes decision-makers have incomplete information, wrongly defined objectives, and disputable criterion of choice. This model does not take into consideration experience or intuition (Zidi L. et al 2013). The political model’s limits are noticeable as thus: by emphasizing particular strategies this model tends to mask the fact that rules and structures, in which these strategies operate, are also instruments of power. It also neglects the existence of elements that transcend particular strategies such as common values, projects, and identity. The disadvantages of the administrative model are that the right decision is not necessarily the one chosen by decision makers, it may only postpone conflicts, the negotiation process can be confusing, it can be subject to pressure from private interests, and it can be realized after the fact that the information provided was deliberately distorted. All of this may be detrimental to collective learning. The garbage can model has an anarchic vision with no order, which only develops approaches that put more emphasis on action rather than on the decision.

 

In conclusion, business environments are undergoing rapid changes, which puts pressure on managers regarding which decision to make to adapt to changes, safeguard interests and make businesses more efficient. Various decision-making models are utilized to aid managers in making the best decision possible. But each of these models has limitations, which makes the decision-making process imperfect. We must remember that the realization of the different models in practice is very complex and, as pointed out, each comes with its individual limitations. Consequently, it is up to the decision maker to identify which decision-making model is most suitable to their situation, and it is up to them to implement it correctly.

 

References

  1. Al-Tarawneh, H. (2012). The Main Factors beyond Decision Making. Journal of Management Research, 4(1), p.2.

 

  1. Boddy, D. (2011). Management an introduction (5th ed.). Financial Times Prentice Hall

 

  1. Coyle, John J., Edward J. Bardi and C. John Langley, Jr. (2003). The Management of Business Logistics: A Supply Chain Perspective (7th ed.) South-Western, Mason, Ohio

 

  1. Jovanovic, Z. (2015). Management and changes in business environment. Ekonomika, 61(2), pp.144.

 

  1. March, J. and Simon, H. (1993). Organizations. Cambridge, Mass: Blackwell.

 

  1. Pride, W., Hughes,, R. and Kapoor, J. (2010). Business. [ebook] USA: Cengage Learning, p.179. Available at: https://www.google.mu/search?ei=dCwkWuWyCsL9UOfmnbgF&q=cengage+learning&oq=cengagelear&gs_l=psy-ab.1.0.0i10k1l3j0i10i30k1l7.13254.14642.0.16865.4.4.0.0.0.0.387.1095.2-3j1.4.0….0…1c.1.64.psy-ab..0.4.1092….0.21DAQpL1gKk [Accessed 3 Dec. 2017].

 

  1. Rosenzweig, P. (2014). The benefits–and limits–of decision models. [online] McKinsey & Company. Available at: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-benefits-and-limits-of-decision-models [Accessed 23 Nov. 2017].

 

  1. Simon, H. (1979). Administrative behavior. New York: Free Press.

Weber, R. and Camerer, C. (2003). Cultural Conflict and Merger Failure: An Experimental Approach. 4th ed. [ebook] Pasadema: INFORMS, p.401. Available at: https://people.hss.caltech.edu/~camerer/mgtsci03.pdf  [Accessed 30 Nov. 2017].

 

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