LO1 Apply different approaches used to support effective decision-making

P1 Explain and apply different formal and informal approaches used to support effective

decision making in a given organizational examples

Learning outcomes:

1.Knowledge- based approach

2.Formal vs. informal approaches

3.The role of stakeholders in decision making

4.‘Make or Buy’ decision

5.Limiting factor analysis

6.Key factor analysis

 Sustainability

• What is 'Sustainability'?

Sustainability focuses on meeting the needs of the present without compromising the ability

of future generations to meet their needs. The concept of sustainability is composed of three

pillars: economic, environmental and social - also known informally as profits, planet and

people. Sustainability emerged as a component of corporate ethics in response to perceived

public discontent over the long-term damage caused by a focus on short-term profits.

• For example , a factory that allows its waste to flow into a nearby body of water to

avoid the short-term costs of proper disposal can cause expensive and significant

longterm environmental damage. Sustainability encourages businesses to frame decisions

in terms of years and decades rather than on the next quarter's earnings report and to

consider more factors than simply the profit or loss involved. For more information:

https://youtu.be/kZIrIQDf1nQ

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Topic 1

The importance of decision making and making financial decisions

Decision Making Definition

- Decision making is a process of selecting the best among the different alternatives. It

is the act of making a choice. It is also regarded as one of the important function of

management.

Managerial functions like planning, organizing, staffing, directing, coordinating and

controlling are carried through decisions

- According to Stephen P. Robbins, “decision making is defines as the selection of a

preferred course of action from two or more alternatives.”

Decision Making Steps

1. Defining the problem

2. Gathering information and collecting data

3. Developing and weighing the options

4. Choosing best possible option

5. Plan and execute

6. Take follow up action

 Finance Manager: Three Major Decisions which Every Finance Manager Has to

Take

Some of the important functions which every finance manager has to take are as follows:

i. Investment decision ii.

Financing decision iii.

Dividend decision

i. Investment Decision (Capital Budgeting Decision):

This decision relates to careful selection of assets in which funds will be invested by the

firms. A firm has many options to invest their funds but firm has to select the most

appropriate investment which will bring maximum benefit for the firm and deciding or

selecting most appropriate proposal is investment decision.

Cash Flow of the Project Return on Investment Risk Involved

ii. Financing Decision

The second important decision which finance manager has to take is deciding source of

finance. A company can raise finance from various sources such as by issue of shares,

debentures or by taking loan and advances. Deciding how much to raise from which source

is concern of financing decision. Mainly sources of finance can be divided into two

categories:

1. Owners fund. 2.

Borrowed fund.
iii. Dividend Decision

This decision is concerned with distribution of surplus funds. The profit of the firm is

distributed among various parties such as creditors, employees, debenture holders,

shareholders, etc.

Payment of interest to creditors, debenture holders, etc. is a fixed liability of

the company, so what company or finance manager has to decide is what to

do with the residual or left over profit of the company.

1. Better Utilization of Resources

Decision making helps to utilize the available resources for achieving the objectives of the

organization.

2. Facing Problems and Challenges

Decision making helps the organization to face and tackle new problems and challenges.

Quick and correct decisions help to solve problems and to accept new challenges.

3. Business Growth

Quick and correct decision making results in better utilization of the resources. It helps the

organization to face new problems and challenges. It also helps to achieve its objectives

4. Achieving Objectives

Rational decisions help the organization to achieve all its objectives quickly. This is because

rational decisions are made after analyzing and evaluating all the alternatives.

5. Increases Efficiency rational decisions help to increase efficiency. Efficiency is the

relation between returns and cost. If the returns are high and the cost is low, then there is

efficiency and vice versa.

Rational decisions result in higher returns at low cost.

6. Facilitate Innovation

Rational decisions facilitate innovation. This is because it helps to develop new ideas, new

products, new process, etc. This results in innovation. Innovation gives a competitive

advantage to the organization

7. Motivates Employees

Rational decision results in motivation for the employees. This is because the employees are

motivated to implement rational decisions. When the rational decisions are implemented the

organization makes high profits. Therefore, it can give financial and non-financial benefits to

the employees.

8. Pervasiveness of decision making: the decision is made in all managerial activities and

in all functions of the organization. It must be taken by all staff. Without decision making

any kinds of function is not possible. So it is pervasive.

Topic 2

Knowledge-based decision making (KBDM)

Knowledge-based decision making (KBDM ) in management is a decision-making

process which process involves an agreed criterion, which is used to measure and

ensure that the most suitable outcome can be generated for a specific topic. This

process is used as a guideline to make the most effective and strategic decision as it

establishes a thought process, reasoning behind a decision but also collects vital

background essentials to together to increase understanding about a topic or agreed

criteria.

Process OF KBDM :

1. A topic is specified

2. Relevant background information and key facts are identified and gathered in relation
to the specified topic. This information is then located in a mutual location, which can

be sourced by all decision makers. At this stage decision makers may add to any

outstanding information.

3. The background information present is analyzed using a set criteria or a set of

questions by the decision makers, during this stage questions can queries are created.

4. A discussion occurs between all decision makers, questions and queries are discussed
during this stage. Concerns and opinions are also stated during this stage.
5. From the discussions and information gather a summary is made. The purpose of the
summary is to clearly outline key factors that are most relevant to the specified topic.

6. The results and findings from the analysis are discussed among decision makers as a
group in order to ensure that the best possible outcome can be made strategically.

Purpose OF KBDM

The KBDM process allows the main focus and emphasis to be on the actual decision

and reasoning, not the people who make the decision, so authority is not a major

factor.
 KBDM is considered a process. Within processes there are structures in place,

structures can allow methodical approaches to occur and therefore indicates a starting

point when making vital decisions. From this KBDM to be used as an indicator and

standard guideline in which can be applied to decision- making situations.

During the beginning of the process relevant information is gathered so that overall

decision can be based on background information and factual knowledge. By

researching background information it can assist the focus levels in the topic particular

area. The structure present enables the thought process of a decision to be specified

and states the reasons behind a decision, so if an issue does occur with the overall

outcome the thought process can be evaluated thoroughly.

In association with business, the KBDM process can give companies or organizations

a competitive advantage, create common grounds and gain understanding of others

within the same sector due to the structured format. The structure supports and is

suited to assist long- term planning and strategic decisionmaking.

Key elements

Open communication between leadership and membership consists of being

able to demonstrate face-to-face dialogue, exchanging information, experiences

and facts to one another; each party takes turns to listen and respects what others

have to say.

Dialogue before deliberation "I must consider all the facts and examine the possible

consequences".
 All decision makers have common access to information – All information involved

in the KBDM process must be distributed equally to all decision makers and the

sources should be in a mutual location to ensure the same grounds for each decision-

maker.

We exist in a culture of trust – Organizational culture is coming from individual

beliefs, procedures, norms, values and meanings, this is shared to other members in

organization. Organizational culture has an impact on individual’s behavior in various

situations.

Advantages OF KBDM

open communication

• Contributes to increase relevant overall knowledge and understanding about the topic,

doing this can limit both confusion and misunderstandings.

Dialogue Before deliberation

• Provides opportunity for decision maker's to prepare by viewing background

information founded, this can generate a better understanding of the topic involved.

• Decision makers prepared for discussion as they have the chance to generate questions

and identification of specific aspects of the findings and information they want to

discuss or develop on.

• Decision maker's gaining a clearer and rounded understanding of the topic beforehand

from background information provided.

• Gives clear direction of conversation

 All decision makers have common access to information

• Having information published in one location it can contribute to ease of access, but

also ensures availability, so if any of the decision makers wanted to view information

before a meeting they would be able to do this efficiently and effectively.

• Publishing information beforehand allows members to have a sufficient time period to

become informed about present content provided, generate further questions and

express opinions about the matter in order to reach the most suitable outcome.

We exist in a culture of trust

• Helping, advising and supporting one another.

• Working towards the same goals, group effort.

• Authority isn't a large factor; the content of the information to make an informed

decision is most import.

• Group members are more likely to support decision made due to the contribution.

Disadvantages OF KBDM Open communication

• There is always a chance that some decision makers will not communicate effectively,

so confusion can always occur.

• Miscommunication between individuals due to different perceptions.

Dialogue Before deliberation

• Some individuals may not have read the background information thus not understand

the direction of conversation.

 • Background information provided may be hard to understand thus impact preparation

time.

• Unexpected issues will constantly arise.

All decision makers have common access to information

• Technology could be a barrier; information stored on a computer based system may be

lost.

• Background information can soon be out-dated.

We exist in a culture of trust

• New decision makers may not fully understand the culture of the environment.

Formal vs. Informal Decision Making Approaches

Formal Decision Making Approach :

A formal channel of decision making is usually controlled by managers or people who lie

in the top hierarchy in an organization. It is an official channel that is deliberately structured

to form a communication chain in and organization to achieve organization goals.

Information that flows through formal channels is accurate, authentic and legally valid.

Formal decision making involves memos, reports, letters, orders, instructions etc. that flow

up and down the hierarchical system in an organization and presentations, advertising and

branding materials that are presented to the public.

Informal channel of communication

Is an unofficial and unstructured channel which is not prescribed by the organization but

exists due to personal and social needs of people working in an organization?

Information that passes through informal means is not official but may be merely rumors or

gossips.

Informal decision making chain that exists within an organization is also known as

grapevine. A grapevine is created and controlled by the people within the organization and

follows no specific rules or regulations. Information through grapevines spread very fast and

flows in every direction.

Formal and Informal Communication may take place between individuals for various

reasons. Informal Communication usually takes place due to the influence of various

factors that are more emotional and psychological in nature. Some factors that foster

Informal Communication in a typical office environment are:

Low Confidence – Low self confidence levels of Employees makes them form

a group and cling on to the same so they feel at ease

Low Efficiency – Lack of efficiency in Employees makes them afraid to handle

situations and people. They seek support in peer group where similar people

look for Company. This results in the formation of Grapevine groups who talk

things just to satisfy themselves

Lack of Direction – When employees lack direction, the uncertain feeling that

is created among them leads to gossips fostering Grapevines

Psychological Issues – Psychological imbalances caused due to the fear of

losing job acts as one of the major factors in the formation of Grapevines. This

is mainly due to the feeling of safety that such group formation offers to all in

the group.
That gives already a clue about why formal decision making has advantages. The nicest thing

about formal decision making is that, if the specific process itself is good and executed well,

it builds a lot of trust. The clearer the form of the process becomes the more people dare to

participate. And the more people of a group participate in a process the more valid they

found solutions get.

Informal decisions, to be sustained, require a lot of trust and can easily lead to confusion,

especially in growing and changing groups, and by that slow down workflow significantly in

the long run. This can lead to frustration and loss of trust. The big advantage of informal

decisions is that they are fast in the short run and need less communication.

The speed of informal decisions is only short lived. Though they can be implemented really

quickly there in transparency will create the need for reasoning, especially for important

decisions. Communicating this reasoning properly so that it does not undermine trust will

take longer as using a trusted formal process.

Comparison formal decision vs. informal

Decision making Formal decision making Informal decision making

Approach

Origin Deliberately structured Spontaneous and unstructured

Nature Well planned, systematic and unplanned, unsystematic and

authorized unauthorized

Flow Prescribed through chain of Unofficial channels, not

command prescribed

Flexibility Rigid Flexible

Authority Official channel unofficial

Purpose To achieve business objective To satisfy personal needs

Speed Time taking Fast

Accuracy Accurate, legal and authentic Often distorted, may be rumors

and gossip

Form Oral and written Usually oral

Source Can be traced Can't be traced

Clearness level Clear about who participates Unclear about who participated

when and how in the decision when and how in the decision

making if documented properly. making

Organization Builds equality and trust Is faster in adhoc use and

Protocol long-term way meaning the longer is completely adjustable because

It's used the more trust it there is no obvious protocol

builds.

Transparency level transparent In transparent

 Stakeholder Participation

Stakeholder participation is an increasingly accepted component of natural resources and

environmental planning processes in the United States and some parts of the world. In the

U.S., stakeholder participation has been codified in environmental planning (e.g., the

Administrative Procedure Act and the National Environmental Policy Act). Outside of the

United States, international bodies such as the European Union, the World Bank, and World

Commission on Dams have incorporated stakeholder participation into policy making and

planning procedures.

STAKEHOLDER PARTICIPATION APPROACHES

Public hearings . This method may be the most common form of public engagement.

Citizen advisory committees and task forces . Such bodies are typically appointed to

address a specific issue for a limited term.

Policy dialogues . These encounters bring together stakeholders for the purpose of

increasing understanding of a problem or issue.

Surveys. Surveys generate information about the knowledge, beliefs, values and

opinions of a wide range of the public. If properly executed, they are effective at

ascertaining the degree to which certain perspectives represent the broad views of the

general population.

Focus groups . Focus groups are meetings of targeted subpopulations for concentrated

discussion about a particular issue. These groups can help gather large amounts of

information quickly with little expense.

The Role of Stakeholders in Decision Making

1. Identify the Stakeholders in your Decision Making Process

2. Use Stakeholder mapping (where are they? What are their interests? How can they be

useful?)

3. Develop Strategies to Maximize Stakeholder

4. Support Engage them https://www.slideshare.net/messageforu/stakeholders-in-

business-16038680
 The make-or-buy decision

The make-or-buy decision is the act of making a strategic choice between producing an

item internally (in-house) or buying it externally (from an outside supplier). The buy side of

the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a

firm that has developed a product or part—or significantly modified a product or part—is

having trouble with current suppliers, or has diminishing capacity or changing demand.

The make-or-buy decision is the action of deciding between manufacturing an item

internally (or in-house) or buying it from an external supplier (also known as outsourcing).

Such decisions are typically taken when a firm that has manufactured a part or product, or

else considerably modified it, is having issues with current suppliers, or has reducing

capacity or varying demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the

strategic level is the more long-range of the two. Variables considered at the strategic level

include analysis of the future, as well as the current environment.

Issues like: government regulation, competing firms, and market trends all have a strategic

impact on the makeor-buy decision. Of course, firms should make items that reinforce or are

in-line with their core competencies. These are areas in which the firm is strongest and

which give the firm a competitive advantage. Considerations that favor making a part

inhouse:

• Cost considerations (less expensive to make the part)

• Desire to integrate plant operations

• Productive use of excess plant capacity to help absorb fixed overhead (using existing

idle capacity)

• Need to exert direct control over production and/or quality

• Better quality control

• Design secrecy is required to protect proprietary technology

• Unreliable suppliers

• No competent suppliers

• Desire to maintain a stable workforce (in periods of declining sales)

• Quantity too small to interest a supplier

• Control of lead time, transportation, and warehousing costs

• Greater assurance of continual supply

• Provision of a second source

• Political, social or environmental reasons (union pressure)

• Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

• Lack of expertise

• Suppliers' research and specialized know-how exceeds that of the buyer

• cost considerations (less expensive to buy the item)

• Small-volume requirements

• Limited production facilities or insufficient capacity

• Desire to maintain a multiple-source policy

• Indirect managerial control considerations

• Procurement and inventory considerations

 • Brand preference

• Item not essential to the firm's strategy

The two most important factors to consider in a make-orbuy decision are cost and the

availability of production capacity.

Elements of the "make" analysis include:

1. Incremental inventory-carrying costs

2. Direct labor costs

3. Incremental factory overhead costs

4. Delivered purchased material costs

5. Incremental managerial costs

6. Any follow-on costs stemming from quality and related problems

7. Incremental purchasing costs

8. Incremental capital costs

Cost considerations for the "buy" analysis include:

1. Purchase price of the part

2. Transportation costs

3. Receiving and inspection costs

4. Incremental purchasing costs

5. Any follow-on costs related to quality or service Limiting Factor Analysis

If an organization manufactures more than one product and faces a shortage in the supply of

a single resource (e.g. labor hours, machine hours or a material) that is required in the
production of its multiple products, what quantities of its various products should be

produced to maximize profits?

One option would be to determine production quantities on the basis of contribution per unit

of the different products (i.e. products with higher contribution per unit shall be given

preference over products with lower contribution per unit).

Prioritizing production on the basis of contribution per unit however would not

maximize profits as the approach fails to take into account the contribution of various

products relative to their usage of the limiting resource which shall ultimately determine the

overall profit. Therefore, when facing a situation involving a single limiting factor, products

should be prioritized in the production plan according to their contribution per unit of the

limiting resource.

Key Factor Analysis

Firms face many constraints on their activity and plan accordingly:

1. limited demand

2. limited skilled labor and other production resources

3. Limited finance ('capital rationing').

For example, a firm is facing a labor shortage this month due to sickness and, as a result,

cannot produce the number of units that it would like to. How should its production plan be

revised?

Key factor analysis is a method used for decision making in the short term with one limiting

factor. If there are two or more scarce resources, then linear programming should be used

instead.
 Key factor analysis - calculations

The usual objective in questions is to maximize profit. Given that fixed costs are unaffected

by the production decision in the short run, the approach should be to maximise the

contribution earned.

If there is one limiting factor, then the problem is best solved using key factor analysis.

Step 1: identify the scarce resource.

Step 2: calculate the contribution per unit for each product.

Step 3: calculate the contribution per unit of the scarce resource for each product.

Step 4: rank the products in order of the contribution per unit of the scarce resource.

Step 5: allocate resources using this ranking and answer the question.

LO1 Apply different approaches used to support effective decision making

P1 Explain and apply different formal and informal approaches used to support effective

decision making in a given organizational examples.

M1 Analyze the different formal and informal approaches applied to support decision

making, addressing both advantages and disadvantages.

D1 Critique the use of different formal and informal approaches to support decision making

in given organizational examples

Guidelines

1. Decision Making Definition, The importance of decision making and making

financial decisions

2. Knowledge-based decision making (KBDM): Definition, explanation with example 3.

The make-or-buy decision: Definition, explanation with example

4. Formal vs. Informal Decision Making Approaches:

Definition, explanation with example (Choose an organization and apply both

approaches) then make a comparison between both approaches (Advantages and

Disadvantages). Finally, Critique the use of different formal and informal approaches

to support decision making in given organizational examples

5. Limiting Factor Analysis : Definition, explanation with example