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STRATEGIC DECISION MAKING

Prepared by : Team teaching of “IC-UTK”

Uncertainty and Risk Management


Within each organization, there are goals and objectives to be achieved but due to various
factors in carrying out its activities, the organization faces various uncertainties, both small
and large. Uncertainty is caused by insufficient information, understanding or knowledge
associated with an event, which can result in something happening that is a risk.
Risk is a result of uncertainty. Risk is often referred to as a combination of the impact of an
event and the likelihood of its occurrence.

Risk is a result of the uncertainty that is inherent in the goals of the organization.
Risk is a combination of the impact of an event and the likelihood of its occurrence.

“Uncertainty is a state associated with an event, its impact, and the likelihood of it
happening ". Everything associated with achievement is never independent of uncertainty.
Vladimir Trbojevic notes that reducing uncertainty does not necessarily directly reduce the
risk, but it is a better approach to prevention.
Confidence is based on the degree of certainty in every process. The degree of certainty can
be known by using risk measurement tools to reduce as much "known uncertainty"as
possible, even if we cannot do anything about the "unknown uncertainties".
Claire Darlington: a degree of certainty can achieved by gaining as much information about a
phenomenon as possible so as to reduce the impact of known uncertainty.
Aquired information of a phenomenon is referred to as ‘known certainty’.

Risk informed and Risk based.


Ian Dalling: Risk informed decision making is decision making based on information about
the risks that are known in the form of experience and expertise.
While Risk based decision making is structured decision making based on information about
the risk that is obtained from a system.
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In the world of medicine, a doctor usually makes decisions based on informed risk. An
example would be a case where a person may need surgery. This surgical decision by the
doctor is taken quickly before the patient's condition gets worse. Based on their experience,
doctors are able to quickly decide what action should be immediately implemented.
While decision-making that is risk based is commonly found in organizations that apply risk
management.
With the implementation of structured risk management, individuals or organizations can
identify, analyze, and evaluate any existing risks, in order to obtain complete information to
assist in more definite decision-making.
Conclusion: Current risk management is the best way to obtain proof of an existing
phenomenon.
Bibliography : International Standard. (2009). ISO 31000: Risk Management - Principles and
Guidelines.

Risk and Uncertainty


Frank Knight (1922), a state is considered to contain uncertainty if there is no objective
probability (definable) of the result or event occurring.
Risk implies danger.
Risk is a state of uncertainty where the event of an unwanted state can cause a loss.

Event Risk or 'Risk Event' can be interpreted as an event that may pose a risk.
Risk is defined in two ways: in the broad sense and in the narrow sense.
1. The definition of risk in a broad sense is an uncertain situationinvolving the possibility of
events (perils) and the possibility of their occurrence (consequences). These possibilities can
result in:
- Loss
- No loss (no loss or achieving break even )
- Gain
2. The definition of risk in the narrow sense is: a result that causes loss (loss).

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Definitions of Risk in general are as follows:
1. Risk is the unpredictability / possibility of an unfortunate event. For example, accidents,
disasters and so forth.
2. Risk is an unpredictable or a distinct trend of actual results with predicted results.
3. Risk is the uncertainty / possibility of loss, break even or profit.
Risk is the underlying uncertainty or doubt about a future outcome.
The different levels of risk are reflected in the words 'possibility' and 'inability to predict'.

Uncertainty
Uncertainty is a core concept of risk. We can say that the concept of uncertainty implies
doubt (which is based on the lack and imperfection of information or knowledge) about the
future.
When we know what will happen, then risk is minimized. We will never always know what
will happen and therefore some things are risky uncertainties.

There are 4 components of risk uncertainty, namely:


1. Resources
Natural, human, financial, and so forth.
2. Threatening events or peril.
Fire, Collision, Flood, Earthquake and other perils.
3. Consequences
The natural consequences of things.
4. Hazards (physical and moral)
They influence the probability of occurrence or non-occurrence of events.
Having understood each of these uncertainty risks, we rationally have to do what is called
risk management, to anticipate possible and potentially fatal results (outcomes,
consequences).

Risk types
1. Pure risk
Pure risk is an uncertainty because there is only a loss opportunity and not a profit
opportunity. If the risk does not materialize then it does not cause any loss but also does

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not generate any profit. There are only 2 types of consequence of pure risk: loss or
break-even e.g. the possibility of theft, accident or fire.
2. Speculation or Speculative risk
This is risk associated with only two possibilities, namely the opportunity to lose or gain
a profit. An example is an investment by buying shares in the stock exchange.
3. Individual risk
These involve the possibilities that occur in everyday life. e.g. the risks that arise if we
have a house or a car. This risk is divided into three types:
a. Personal risk - a risk that affects a person's capacity or ability to make a profit, e.g. an
accident or job loss.
b. Property risk - the risk of financial loss if we own an object or property e.g the
opportunity of goods being lost, stolen or damaged.Losing something valuable can
be differentiated into two types:
- Direct losses: They occur when your property is lost or damaged.
- Indirect losses (consequential): They are losses incurred by original losses.
An example is when a house is destroyed or damaged by a natural disaster.
c. Liability risk is a risk we may experience or suffer as a liability due to loss or injury to
others. For example, giving compensation if you cause an accident.

Risk Management consists of 4 activities, namely:


1. Identifing event risk
2. Measuring its impact and frequency
3. Mitigating risk (finding a solution to prevent or anticipate a risk)
4. Monitoring risk

Overcoming uncertainty
Overcoming uncertainty lies in ascertaining how much certainty is gained from risk
management by knowing the probability and impact of a certain risk. If the probability of a
risk is known then the decision maker has an increased degree of certainty or confidence in
making a decision.
An increased level of Certainty will thus increase confidence in making decisions.

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Measuring Instruments.
Claire Darlington and Ian Bayne argue that it is difficult to know the degree of certainty in
risk management and that, in fact, we can not do anything about "unknown uncertainties".
One of the tools for measuring risk is determining how much we understand a phenomenon
by reducing as much of the "known uncertainties" as possible.

Tactical decision making


Tactical decision making is the choosing of alternatives and must be done immediately for
short term problems. Tactical decision making is small-scale decision making, tactical
decisions tend to be short-term but may have long-term consequences or benefits and
should support the overall goal even if it is involved in short-term or small-scale immediate
goals. example: The decision whether a company produces its own small component or
purchases it from a distributor, must be well considered because it must support the overall
strategic objectives of the company.

The Model approach to making tactical decisions


The following 6 Steps describe the decision-making process:
1. Recognize and assign problems
2. Identify alternatives
3. Identify the costs and benefits associated with each viable alternative.
4. Compute the quantitative factors.
5. Judge the qualitative factors.
6. Present alternatives that offer the greatest benefits.

Some examples of tactical decision making:


1. The decision to buy a part or make it themselves.
2. The decision to maintain or close a business segment.
3. The decision to accept or reject a special Order.
4. The decision to sell or further process a product.

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For example, in producion or buying decisions, qualitative considerations deal with the
quality of the product or material, the price and its relation to the employment factor, the
image and so on. (as for example) : I once worked in the automobile industry where the
company made cars and was often confronted with the problem of making parts themselves
or buying them from suppliers. Generally, they bought from suppliers because of the high
investment cost to produce some items themselves. For example, car windshields, tires and
rear-view mirrors etc were required. These non-core accessories or products were too
various and thus costly to produce by themselves.

Making a Strategic Decision


One of the duties of a leader is to make decisions. The ability to make decisions is a skill or
competence. How can a leader make quick and precise decisions? Appropriate decision
making means that 'strategic' decisions and every form of decision-making is always related
to the solving of a problem or challenge.
The style and method of decision-making will depend on the following 4 different aspects
relating to the problem:
1. The 'nature' of the problem.
2. The 'impact and risk' of the decision.
3. The 'responsibilities' of decision making.
4. The 'urgency or insistence' of the decision.
Decision-making will also depend heavily on the type of problems encountered.
Strategic understanding results in a decision that contains high value, is effective and has
great benefits for the long term, i.e. when deciding on company policy relating to a large
investment plan, strategic decisions will involve systemic analysis of all aspects that affect
the problem.
Systemic analysis is the evaluation of a problem by considering several main factors and
secondary factors related to the problem.

Analysis of Decision Making


The overall goal of strategic decision making is to choose alternative strategies so that long-
term competitive advantage can be achieved.
In day-to-day management, decisions can be classified into two major groups:
A. Routine decisions :

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These are management decisions that occur repeatedly with the same conditions. Usually
patterned with the "if-then (if-then)" condition.
Examples are decisions regarding:
1. Maintenance of vehicles,
2. Monthly Payroll,
3. Overtime cost calculations.
B. Specific decisions:
These are management decisions that do not routinely occur. These decisions concern a
specific problem (special) and need a thorough analysis of information.
This decision is also called a tactical decision. Proper tactical decision making means that the
decisions made meet not only limited goals but also long term goals.
In general, specific decisions can be grouped into;
1) Buying in or Making your own
2) Replacing Fixed Assets
3) Accepting or rejecting special orders
4) Continuing the production process
5) Closing a business segment
6) Determining the allocation of limited economic resources.

Ethical Tactical Decision Making


Laying off employees to raise earnings in the short term can be a tactical decision. However,
if the benefits are only to increase short-term profit and not support the company's long-
term strategic objectives, then the decision must be questioned. Is the decision ethically
correct?
Ford Motor Company decided to remove the rubber on the side of their Sable motor car
which saved 100 dollars per car, but lead to increased accident damage for buyers. Also, Ford
saved $ 7 per car by using thinner fuel tanks on Pinto cars which increased the fire hazard
risk.
Ethics in Tactical Decision Making, ethical issues are concerned with how decisions are
implemented and their possible long-term goals.
Decision-making should always maintain an ethical framework. Achieving goals is important,
but how to achieve them is more important. examples: A decision to use external

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production may result in lay offs; creating a fictitious partner or violating signed contractual
agreements could lead to negative legal action.

References :
1. Esther Tippmann, Pamela Sharkey Scott, Andrew Parker, Boundary Capabilities in MNCs:
Knowledge Transformation for Creative Solution Development, Journal of Management
Studies, 2017, 54, 4, 455Wiley Online Library

2. Pieter Vandekerkhof, Tensie Steijvers, Walter Hendriks, Wim Voordeckers, Socio-Emotional


Wealth Separation and Decision-Making Quality in Family Firm TMTs: The Moderating Role of
Psychological Safety, Journal of Management Studies, 2017Wiley Online Library

3. Stefan Linder, Joel Bothello, Antecedents to Autonomous Strategic Action: What About
Decline?, IEEE Transactions on Engineering Management, 2015, 62, 2, 226