Types of Decisions a Manager Faces

Decision making is a constant and continuous management activity. Although managers perform many other activities such as planning, organizing, communicating, and influencing others, it is the ability to make good business decisions that distinguishes a strong manager from a weak one.

There are many different ways of looking at the decision making process. Frequently, decisions are classified as operational, tactical, or strategic. Each type of decision has different characteristics and requires different types and sources of data.

Fig. 2. A Hierarchy of Decisions

Operational decisions. Operational decisions deal with the routine day-to-day operation of the organization. These “bread and butter” activities that every organization must perform well in order to remain in business — order processing, inventory control, customer billing, production scheduling, and so on. The decisions associated with these activities are delegated to the lowest possible level of the organization, where they can be made quickly and most effectively.

Operational decisions tend to be recurring — the same question comes up again and again. As a result, the decision-making process becomes relatively routine and quite structured. The variables that should be considered in making the decision are identified, their values are known with a high degree of accuracy, and the relationship between variables and the decision is understood.

Operational decisions have an immediate but short-term impact on the firm. For example, should an inventory control clerk fail to reorder a high-turnover item, the item will soon be depleted. However, the firm can recover from the mistake and replenish the item within a short time with no long-lasting effect on profitability.

Tactical decisions Tactical decisions involve allocation and control of the firm’s resources to meet the objectives that support the strategic goals of the business. These decisions are typically made by middle-level managers responsible for implementing the means for meeting the goals and objectives that upper management has established.

Tactical decisions have an immediate impact on the firm. The impact may not be felt for a few weeks, but can affect operations for several weeks or longer. Although it may be very difficult to live with the impact of a poor tactical decision, one such bad decision will not destroy the firm.

Strategic decisions Strategic decisions include setting the goals of the company, defining the basic assumptions on which long-range planning should be based, and identifying the critical success factors of the firm. These decisions form the basis on which the firm will run and provide the basic guidelines for others to follow in making tactical and operational decisions.

Strategic decisions tend to be highly complex, unstructured, and non-recurring. All the variables that need to be considered cannot be identified. Much of the information needed to reach the decision is about things external to the firm — information about competitors, suppliers, customers, and the overall industry in which the firm competes. Due to the lack of precise data and clear cause-and-effect relationships, there is a high degree of uncertainty associated with the outcome of a strategic decision. These are decisions with a high degree of risk that senior management must be prepared to make.

Strategic decisions have a long-range impact on the firm. It may take several months or even years to know the true effect of a strategic decision, and it is very difficult to reverse its impact. One or two incorrect strategic decisions in a single year can ruin a firm.

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