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 long-
term 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://www.youtube.com/watch?v=B5NiTN0chj0

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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 decision-
making.
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 Protocol Builds equality and trust Is faster in adhoc use and
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 make-
or-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 in-
house:
 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-or-
buy 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