Decision-making is the bedrock of business success which influences almost every aspect of corporate life, from investment to customer service. A good decision maker helps a business succeed and boosts profit. A poor decision maker, on the other hand, could jeopardize not only business growth but also sustainability.
As defined by the Management Study Guide, “A decision can be defined as a course of action purposely chosen from a set of alternatives to achieve organizational or managerial objectives or goals,”
Let us consider both Short Term and Long Term effect of decision making in a company.
Short Term Decisions are operational, tactical in nature, meeting short term goals, or reaching to a crisis, that is, making best use of resources in the short term. Each decision involves relatively, small amount of monetary value and relatively easy to reverse or change decision, withdraw from activity if the business environment changes. Short-term decisions could include whether to resolve staff shortages by using agency staff, to make something in-house or buy it in, to offer special packages/ reduce prices to boost short-term sales or to accept a booking/one-off contract.
Short-term measures are effective at getting employees focused on specific targets. For example, if you’re looking to push a new project line, setting a sales goal influences your workers to stress its attributes to customers. This can be achieved by setting commission-based compensation policies or offering bonuses to top performers. Short-term effects also are paramount when they’re critical to business needs. A struggling new business that needs to reach its revenue goal to pay back stakeholders may push heavily for current period sales, regardless of discounts required to influence them.
Long Term Decisions on the other hand, are strategic in nature, and impact on corporate level objectives and goals, that is, making the best use of resources in the long term, which involves large sum of monetary value. There should be conscious effort to avoid wrong long term decisions which could have a major financial impact on the firm. Through long-term actions, organizations seek to achieve more significant, even transformation changes that will enable durable success. They may invest in new infrastructure or business areas. These investments take longer to pay off, and can be difficult to quantify in advance — but can act as game changers for an organization.
Long-term goals incorporated into the planning and policy-making process may focus on installing the desired company culture or protecting the brand name, so how decisions affect those areas of your business must be considered. You likely have a vision for what you want your company to look like in five years, 10 years or farther into the future – not just in terms of growth, but perhaps also goals related to customer service or your position in the community. Every decision you make needs to consider its long-term effects on reaching those goals.
All decision making is concerned with making the best choices for the organisation, in financial decision making, this is about the financial impact of the decisions made. Any company has to balance short-term business goals with a long-term vision for the business when developing a strategic plan. While it can be tempting to focus on hitting revenue targets for the upcoming quarter, emphasizing that too heavily can have far-reaching long-term effects.
Short- and long-term effects coexist in a number of ways. For example, a short-term marketing plan may push an upcoming holiday sale and the discounts available to shoppers, while a long-term strategy will be more focused on getting the customer to perceive the brand as dependable and reasonably priced. Both concepts may be included in a single campaign, if the sales flier also touts the product virtues — the sale can increase revenues now and enhance the brand name going forward. However, a company takes on a risk if the short-term sales needs always hold sway – for example, if you’re constantly running sales to get shoppers to buy. That may cause them to see your merchandise as overpriced and unworthy of investment.
Decision making costs money; management time is a basic cost, but long-term decisions can be very expensive to make. Decisions with multi-million being invested may take several months, feasibility studies, information costs, etc. In short-term decision making speed is of the essence, both to keep costs to a minimum and because delaying a decision (slow reaction) could have financial implications for the organisation.
The Benefits of Decision Making
Decision making prevent companies from making rash decisions that hinder business growth. It is an essential part of every business because it optimizes communication, human resources and supply chain management. Effective decision makers navigate complicated situations and choose the right solution that provides their company with the most benefits in the long term. In short, a good decision maker can transform a business.
Poor decision-making can have serious consequences for businesses in every niche. Good decision-making in management helps companies secure sales, generate new leads, improve their marketing processes and increase the visibility of their brand. It is useful for policy planning, too. Ultimately, the best decision makers ensure business success in the future.
Sometimes, the best decisions involve more than one person. Decision makers who include employees in the decision-making process likely improve morale.
Ideally, short-term goals coincide with long-term objectives, moving your business incrementally down the road to its objectives. Focusing on that can help prevent installing policies with short-term effects that detract from long-term goals. For example, if you own a retail shop that sells luxury watches and want to increase sales, bringing in a line of cheaper knockoffs might have that short-term effect. The long-term outcome, however, might be a dilution of your brand identity and a poorer position in the marketplace. As a small-business owner, you have to keep an eye on the long term when viewing short-term effects of a particular decision. In this case, it might be better to emphasize instead a different brand of luxury watch or accessories that might appeal to a wider segment of the market.
The Decision Making Process
Managers make lots of short-term decisions. We will begin looking at how managers make decisions and how to determine if information gathered is relevant to the process. When managers make decisions, they go through these processes. We may not even be aware that we are actually going through these steps as we make decisions. You have probably unconsciously gone through this process in your own decision making.
1. Define the Goal
Whenever we made decisions, there is a goal. The goal can be something simple like “I’m hungry and need to eat something for lunch.” Whenever you are making decisions, there is a goal in mind. The more fully you can define the goal, the better you will be at gathering information later on. If you are hungry and want to decide what to eat for lunch, perhaps you add healthy to the goal. Not just a lunch, but you want to have a healthy lunch.
2. Identify Alternative Courses of Action
You have a solid goal, now it’s time to figure out your alternatives. Let’s use our lunch example. What are some healthy options for lunch? You could eat at home or at the school dining commons. You could go out to eat. If you went out to eat, where could you go? A sit down restaurant is one option. Fast food is another. At this stage we are not assessing the alternatives. Identify the alternative courses of action that appear to fit your goal.
3. Gather and Analyze Information
In step 2, we didn’t think a lot about the alternatives, other than just identifying them. In step 3, we begin to gather information.
If you ate in the dining commons, it would be free (if you have a meal plan). There are lots of choices; hopefully some of them are healthy. They have a salad bar and you are really craving salad and an iced tea. If you went to the dining commons, you would probably run into some of your friends.
The sit down restaurant also has a salad bar and iced tea. The trip would cost you about $15 including tip. Since the restaurant is a bit expensive, it would be difficult to convince a friend to go with you.
The fast food restaurant doesn’t have very good salad options but does have iced tea. Since you want a salad, you decide to remove the fast food restaurant from your alternatives.
Therefore, we are left with two alternatives: Salad bar and iced tea at the dining commons with friends or salad bar and iced tea at a sit down restaurant alone.
As we start to analyze the information, you might notice that there are some things in common between our two alternatives. The meal and beverage are the same under both of the alternatives. When information is the same among all alternatives, that information is irrelevant to the decision being made. They are irrelevant because they will not change which alternative you choose. Irrelevant information should be removed from the information you use to make your decision. Therefore, we need to remake our chart.
Now, all we are left with is the relevant information. Relevant information has two key characteristics:
- It differs among the alternatives
- It happens in the future
Many times, when we are making decisions, we think about things that happened in the past. Maybe yesterday you had fast food for lunch and you didn’t feel great about it afterward. Is that relevant to where you are going to go for lunch today? No. Costs that happened in the past are called sunk costs and are not relevant to the decision you are making now.
Only consider the relevant information when making decisions. It will allow you to consider less information and help speed up the decision making process.
4. Choose the Best Alternative
Sometimes choosing the best alternative is not easy. We cannot just rely on the numbers. We must also consider the qualitative information. Qualitative information is information outside the scope of dollars and cents. There are always other factors that should be considered that cannot be measured. For example, maybe you have a test this afternoon and really need some time to study. Driving to the restaurant would eat up some of your studying time but going to the dining commons means a loud environment and it might be hard to study with your friends at the table. It might be worth losing a few minutes driving and spending $15 to have some quiet time to study.
When making actual decisions, heavily weigh the quantitative factors, if the two alternatives are close, don’t forget to weigh the qualitative factors as well.
5. Implement the Alternative
Once you have made your decision, now is the time to implement it. In this case, go to lunch. In most business decisions, implementation is not that easy. Take the steps necessary to put the alternative chosen into action.
One Final Step
Well done! You’ve made your decision and implemented it. There is one final step that should be taken after your alternative has been put into action. The last step deals with the controlling aspect of managerial accounting. Once your plan has been implemented, you need to review your decision. The review process includes determining if the alternative chosen was the right one and if all of the assumptions made during the decision making process were accurate. You cannot be a successful manager if you do not follow-up after the fact to determine if the choice you made was the right one.
Take charge of your business by redefine your decision making capabilities and excel in business attitude.
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