For those in a hurry: decisions are always complex in practice, but why?

• Decisions arise when there is a choice between different options for action
• Decisions to be made depend on the decision-makers, the business objective and the information available.
• The quality of the decision-making process as a whole depends on the quality of the individual sub-steps.
• The traceability of decisions is particularly important within companies.
• Decisions on the use of Cash position must be made on the basis of appropriate information. In the worst-case scenario, there may be legal consequences.

What is a decision anyway?

This has to be different! This is often how a process of reflection begins, which then leads to a decision. In theory, an essential characteristic of the concept of decision is the possibility of choosing between different options for action, preceded by dissatisfaction with or dissatisfaction with the current situation or the expected development. The classic situation: do we go left or right?

This is, of course, on the condition that there is a will to remove the discontent. So we have agreed to move forward and not stand still. In addition to choice, there are also the aspects of future-relatedness and person-relatedness, so that ultimately the decision is defined in theory as

"... a future-oriented choice between alternative actions or goals, whereby an individual or a group of persons attempts to resolve a conflict situation. The prerequisite is the will to put the chosen solution into action."

In the following, we will now take a closer look at the decision-making process, i.e. the formation and implementation of wills.

The Company System

In the context of decision-making, a company consists of three subsystems - the

1. Target system,
2. Information system and
3. Social system.

These three systems not only influence the individual phases of the decision, but they also influence each other. This is because objectives are set in the target system, but these are influenced by the different objectives of the decision-makers.

It was in Düsseldorf at a lecture of a large bank when a motivational trainer once said a sentence that was very formative for me:

Companies achieve their goals TOTALLY because of the targets we set for our employees. Employees are disloyal to goals, but loyal to the company.

This saying shows very well the possible tensions between a target system and the social system, i.e. the individual goals and also visions of employees. However, there is also something that resonates in this example. Namely, the different or imperfect level of information.

On the one hand, there is a tension between the social system and the information system, i.e. the individual wishes and ideas of employees based on their level of information. This in turn influences the quality of the goal-setting process, i.e. the setting of goals (in the goal system) under imperfect or subjective information.

What effect does this have, or how can it have an effect? Staehle, one of the scientific forefathers in the field of management, has recorded the following findings from his research:

Strategic measures ordered from above are realised only 25% of the time. The failure of 75% of strategic ideas is proven by empirical studies. Strategies from all levels of the hierarchy have a 75% chance of realisation.

Other factors influencing the quality of the decision are

• the motivation and
• the intellectual abilities of the decision-makers,
• the creativity of the decider,
• social skills,
• the manual skills and
• the basic attitude towards the future.

Principle of rational choice

The three subsystems of the company further influence each individual phase of the decision-making process. The process is also called the "principle of rational choice" in theory and is presented as follows:

• Stage of dissatisfaction - in a root cause analysis, the problem at hand is clarified. The decision-maker intends to solve the problem.
• Search phase - here a selection and weighing of possible solutions has to take place. The aim is to "identify the possible alternatives and the limiting data and to specify the underlying objective". The search phase is thus determined by the decision-making methodology, the alternative results and the underlying objective.
• Optimisation phase - this is characterised by the actual decision-making act, which is preceded by a ranking of the evaluated alternative courses of action.
• Enforcement phase - this is characterised by recording and communicating the decision. The subsequent realisation and control of the execution is often already identified as a further decision-making problem, since in most cases the execution is carried out by delegation to subordinate departments.

The first three phases are also referred to as the will-forming process. The quality of this process is strongly dependent on the quality of the individual preliminary stages.

The phases of the decision-making process are to be understood as "formal phases". This means that any decision, no matter what constraints affect the process, can be broken down into these phases. I beg your pardon? Every decision we make can be decomposed into these theoretical phases? We need to look at that more closely.

Only the quality of the design of the individual phases distinguishes the above system of rational choice from practised decisions. In this context, Staehle mentions the following limitations of the principle of rational choice:

• Bounded rationality - due to numerous influences, the decision-maker settles for a satisfactory solution. "Our decision was all right like that."
• Contextual rationality - the scope for decision-making is limited by the environment and by goal conflicts. "We could not have done better in this situation."
• Procedural rationality - using procedures and techniques to try to make the "best" decision possible. 
• Retrospective rationality - only the decision taken is justified.

Decision theory is based on "procedural rationality", i.e. the attempt to make the best possible decision. It tries to create decision-making routines by means of problem-solving procedures.

Theory should facilitate the user's decision and bring it as close as possible to rationality. It therefore requires judgement and experience from the decision-maker, which are combined with facts from the business.

The decision-maker is further forced to specify decision alternatives, to evaluate possible environmental states in terms of their probability of occurrence and to quantificate the consequences resulting from the combination of action alternative and environmental state.

This makes decisions comprehensible - management responsibility becomes obvious. However, one problem with the introduction of decision-theoretical procedures in companies is the necessary professional qualification of the decision-makers. This problem can be solved by internal training or external consultants.

In the course of studying decisions, the literature has modified the model of rational choice and developed it further in the direction of a better understanding of complex decision-making situations. In the following, two models will be briefly explained.

• Muddling through method or incrementalism model
  Just as in the bounded rationality model, the decision-maker is simply looking for satisfactory solutions. He tries to achieve this through a step-by-step approach - a form of procedural rationality. "In this approach, higher-level goals are not the standard of judgement, but planning and decision-making behaviour resemble muddling through, and evaluation processes and political negotiation processes." The decision-maker is therefore not influenced by higher-level goals, but by the current problem situation.
• Konflikt model of decision
  The Konflikt model emphasises the affective side of the decision maker and its importance. Decisions are associated with feelings (hatred, fear, anger and above all stress). Because of these feelings, decision-makers get into massive conflicts, are fearful and decision-shy. Stress in particular affects the decision-making situation (especially the search for information) and thus not least the quality of the decision to be made. Therefore, an appropriate level of stress, which the decision-maker can cope with, is to be aimed at for optimal decision-making behaviour. If the stress level is too low, the decision-maker will neglect the search for information, and if the stress level is too high, the decision-maker will resign himself to the effort and make a purely emotional decision or no decision at all.

Within organisations, the individual phases of the decision-making process are of particular importance, namely when it comes to the traceability of decisions. For this reason, the formal organisational structure or organisational sefficiency exerts a significant influence on the quality of the decision-making process. It therefore supports procedural rationality.

It is particularly important to emphasize the strong influence of the company information system on the other subsystems and on the individual phases of the decision. This applies above all to the topic of Cash position . We have already established that Cash position is essential for the continued existence of the company. Decisions on the use of Cash position must be based on an appropriate level of information. A lack of information or neglecting to monitor Cash position can lead to massive legal problems for managing directors.

In this respect, the traceability of decisions in the area of cash flow management is of essential importance. With appropriate documentation of decisions, issues such as slight or gross negligence can be clearly excluded.

Types of decisions in the company

In the literature, the basic types of decisions in a company are classified as follows:

• Routine decisions and real or one-off decisions
  In the first part of the theory, corporate management decisions have already been dubbed real decisions. Accordingly, these "real" decisions cannot be delegated. Heinz Wissenbach further recognises a genuine decision "when the decision problem is new, must be thought through and requires a decision for which there are at best similar templates." In routine decisions, goals and means can be fixed at least for certain periods of time. Furthermore, past experience can play a significant role in solving routine problems.
• Goal and means decisions
  Goal decisions have already been identified above as the first and foremost task of the dispositive factor, means decisions as decisions on how to achieve these goals. Goal decisions are therefore fixations of "what one wants to strive for oneself or requires others to strive for".
• Individual and group decisions
  These aspects have already been dealt with in the process of setting goals, by noting that personal, but also company expectations flow into the company's goal decisions. The different personal goals, which occur especially in group decisions, are an important factor and must be taken into account in such decisions under all circumstances.
• Well-structured and poorly-structured decision problems
  Well-structured decision problems are characterised by a certain number of possible solutions, by information about the consequences, by clearly formulated premises and by solution algorithms. If one of these characteristics is missing, one speaks of poorly structured problems. This is often the case in practice. Intuition, resourcefulness, experience, etc. are elements of problem-solving behaviour in poorly structured decision-making situations. To further support problem solving, management must draw on and weigh all available information.

In summary, it can be stated for business practice that the decision-maker almost exclusively faces complex decision-making processes. These are characterised by poorly defined and poorly structured decision problems.

The term "poorly defined" is used in this context because the desired end state cannot be clearly determined in advance. "The decision problem is poorly structured because the number of alternatives is immense and no specific solution programme exists to select the optimal one from the large number of alternatives in a reasonable amount of time. We also know this as: "you can no longer see the wood for the trees."

Topics covered in the theory

Part 1: Company, objectives and Cash position

Part 2: Corporate governance and liquidity management

Part 3: Decisions and liquidity management

Part 4: Reporting in the company

Credits: Photo by Kate Joie on Unsplash