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Managing Decision Making In Business

By Charles Hopkins Published 04/20/2006 | Business and Finance
Traditionally, decisions are made at the "top" of an organization and communicated to those "lower down" while feedback on the effectiveness of the resulting actions is sent back to the "top". We can see this pattern in all aspects of life, from our relationship with our parents, through our education, and on into our working life. However, in business such a hierarchical structure is not always an advantage. What options are there for a modern business?

Management science tells us that there are three distinct stages in the development of decision-making processes within organizations. Each of these stages has been fueled by advancements in communication and coordination technologies, starting with the telegraph (invented in 1832) or even with fire beacons and smoke signals in more ancient times.

The first stage of decision-making sees decision-makers, who are only aware of, and responsible to, their immediate environment make decisions independently of other decision makers in the organization. As the cost and efficiency of communication falls, information is gathered centrally and decision-makers become aware of, and responsible for, a wider environment. These more informed decision makers attempt to make decisions in order to maximize the benefits to their organization as a whole. Finally, as communication efficiency continues to improve local decision-makers consult with other related decision-makers to maximize benefit to both their own organization and to their wider business environment.

These three decision-making stages of development are characterized as follows:

Independent Decentralized Control:

In this model, individual units have independent decision-making powers. They act in order to serve their local needs. However, since there is little or no coordination between decision makers, it is possible that decisions made by units locally will conflict with other units' decisions or even the global objective of the organization as a whole.

Centralized Control:

Here a central body makes all decisions. Changes affecting the whole organization can easily be made since the impact of the changes across the organization can be predicted. However, this approach is rigid and forces each organizational unit to conform to a prescribed set of rules governing how they act upon instructions from the central body and how they report on the results of their actions. Furthermore, as the number of distributed units increase, the information flow to the central point of control increases, thus this method lacks scalability.

Connected Decentralized Control:

Decentralized control encourages independent decision-makers to take responsibility for their local environment, however facilities are provided to allow them to consult with other related decision-makers. Because of this connectivity local decisions can be made with a view on their global effects. However, in this model all decision-makers are exposed to all potential information sources, thus powerful information management systems are required.

Since decentralized control brings many managerial benefits, companies usually strive to move from independent decentralized control, through centralized control and on into connected decentralized control. However, as organizations progress towards connected decentralized control they must find a balance between top-down control and bottom-up empowerment.

Too much top-down control will result in a lack of scalability as described in centralized control model, too much bottom-up empowerment will result in a chaotic decision making process with unpredictable results.

To achieve the "perfect" balance between centralized and decentralized control it is necessary to identify conflict points between individual units. These units must then co-ordinate their decision-making processes and knowledge bases. Such coordination requires the sharing of vast amounts of information, which brings with it the potential for "information overload", a situation in which it becomes impossible to identify the relevant data from the irrelevant data.

Further to the problems of information overload are the difficulties of communicating information between decision-makers of differing backgrounds. For example, how does an accountant communicate the impact of a marketing overspend, whilst the marketing people communicate the impact on sales if the budget is not approved, which in turn affects the underlying sales potential for the firm.

In an independent decentralize model there is no control over such decisions. In a centralized model we rely on one individual to understand all three points of view, whilst in a connected decentralized model we rely on a technique to communicate all information in a meaningful and manageable way. This need for efficient communications presents considerable technological challenges since individuals from different backgrounds have different domains of understanding, different decision making processes and different data collection, storage and processing techniques.

Today, ICT is moving towards being complete enough to support a full advancement to Connected Decentralized Control. However, this is not yet possible with an "off-the-shelf" solution. Information Management Systems and Decision Support Systems in particular, need considerable customization and adoption to your organizations needs.

While efficient Information Management Systems can bring massive benefits to your organization you should be aware that around 75% of large Information Systems are considered failures by those who commission them. Tread carefully when commissioning such systems and take your time, be one of the 25% who reap the benefits and continue to grow.
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