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DECISION MAKING
By:
Prof. Kul Narsingh Shrestha

A. DECISION-MAKING : DEFINITION AND APPROACHES

Managers at all levels of organizations make decisions. A decision may be defined as a
choice made from available alternatives. It represents a course of action about what must or must
not be done. A decision is the product of decision making process. It means to come to a
conclusion of a problem.
Decision making is the act of making a choice. It can be defined as the process of
selecting a course of action from among alternatives to achieve a desired goal or to solve a
problem.
Everyday a manager has to take hundreds of decisions in the organizations. Managers
must reach decisions about objectives and plans for their organizational units. They must decide
how to direct, how to organize, and how to control. The success of organization depends upon
the ability to make good decisions and implement their decisions. Peter F. Drucker has said,
"Whatever a manager does, he does through making decisions".

According to J. Stoner:
Decision making is the process of identifying and selecting a course of action to solve a specific
problem.
According to R. W. Griffin:
Decision making is the act of choosing one alternative from among a set of alternatives.
Decision making is an act of problem solving through choosing a particular course of
action, after considering the possible alternatives.
Nature and Features of Decision Making

The nature and features of decision making are as follows:

1. Decision making is a selective process in which only the best possible alternative out of
available alternatives is chosen.
2. It is a human and rational process involving the application of intellectual abilities to a
great extent. It involves deep thinking and foreseeing things.
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3. Decision making is a dynamic process. It takes place within the changing environment.
4. It is a goal-oriented process to achieve certain desired goals or objectives.
5. Decision making implies freedom to the decision maker regarding the final choice.
6. Decision making is a continuous process. From the start of the day to the close, a
manager has to take a number of decisions.
7. Decisions may be positive for doing a thing or may be negative for not doing a thing.

Approaches to Decision-Making
There are three approaches to decision making:
(1) Classical Approach
(2) Administrative Approach, and
(3) Modern Approach
(1) Classical Approach
Classical Approach is a prescriptive model that tells managers how they should make
decisions. In this approach, managerial decision making is assumed to be logical and rational.
Effective decision making requires a rational choice of a course of action. This model assumes
the manager as a rational economic man who makes decision in the best economic interests of
the organization. A decision maker who is rational would be fully objective and logical. This
model is based on the following assumptions:
(a) Managers make decisions to serve the economic interest of the organization.
(b) The problem is clear and unambiguous.
(c) A single, well defined goal is to be achieved.
(d) All alternatives and consequences are known.
(e) Preferences are clear.
(f) No time or cost constraints exist.
(g) Final choice will maximize economic payoff.
Managerial decision making can follow rational assumptions if the manager is faced with a
simple problem in which the goals are clear and alternatives limited, in which time pressures are
minimal and the cost of seeking and evaluating alternatives is low. This approach is based on
theoretical world where seldom all these above assumptions are present. Thus, this approach
becomes an ideal that is not always useful to managers with real problems.
(2) Administrative Approach
This approach was developed by Herbert A Simon. He was one of the first people to
recognize that decisions are not always made with rationality and logic. His view of decision
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making is called administrative model. This approach is also known as behavioral approach. It
is a normative approach, which describes how decisions are actually made. Managers are often
faced with uncertainty and non-programmed decision making situation. This administrative
approach (model) is based on two concepts- bounded rationality and satisficing.

Classical Model Administrative Model

When faced with a decision When faced with a decision

situation managers should . . . situation, managers actually...

 Obtain complete and  Use incomplete and

perfect information imperfect information
 Eliminate uncertainty  Are constrained by
 Evaluate everything bounded rationality
rationally and logically  tend to satisfy

…and end up with a decision … and end up with a decision

that best serves the interests that may or may not serve the
of the organization interests of the organization

Fig. 1.1: Two Models of Decision Making (source: Griffin)

(a) Bounded Rationality: Decisions should be rationale but they are not always fully
rationale. Simon has called this situation as bounded rationality. The decision maker's
rationality is limited by inherently individualized beliefs, values, attitudes, skills, habits and
unconscious reflexes. It is also limited by the complexity of the organization and environments
as well as available information, amount of time and money needed.
(b) Saisficing: By satisficing the decision-maker selects the first solution alternative that
satisfies some minimal set of outcome expectations. In other words, they accept solutions that
are 'good enough'. They are being rational within the limits (bounds) of their information
processing ability. Limited time and money usually discourage in-depth analysis, especially
when an apparently acceptable solution has been identified. Hence, the decision maker satisfices
rather than optimizes and makes decision which he considers satisfactory in terms of his own or
organizationally determined criteria.
The assumptions of administrative approach are as follows:
(a) Decision makers lack complete information.
(b) Environment is uncertain.
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(c) Conditions of uncertainty exists.

(d) There is bounded rationality of decision maker.
(e) All alternatives and their consequences are not known.
(f) Profit maximization is not possible. Satisficing is done.
(g) Decision maker selects the satisfactory alternative.
In summary, classical approach (rationality) is prescriptive whereas, bounded rationality is
a normative approach. In figure 1.1 the decision making process of two approaches are
compared.
(3) Modern Approach
Modern approach is based on step-step process, where managers weight alternatives and
choose the best alternative for decision making. It is the rational process of decision making.
This approach of decision making consists of following steps:
(1) Recognize and define the decision situation;
(2) Identify appropriate alternatives;
(3) Evaluate each alternative;
(4) Select the best alternative;
(5) Implement the alternative; and
(6) Evaluate the results and follow-up

B. TYPES OF DECISION
Decisions are taken at various levels of management. Such decisions are of several types.
They can be classified into the following categories:
Types of Decision
1. Programmed and Non-programmed
decisions
2. Organizational and Personal decisions
3. Individual and Group decisions

4. Policy and Operating decisions

(1) Programmed and Non-programmed Decisions

Programmed decisions are repetitive decision that can be handled by routine procedure.
If a particular situation occurs often, managers will develop a routine procedure or policy for
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handling it. Decisions are said to be programmed if they are repetitive and routine, and a
definite procedure has been developed for what actions should be taken. Such decisions are
usually taken by the middle or lower level managers and have short-term impact. Decision
maker knows in advance what decisions he has to take in a particular set of conditions. In most
organizations programmed decisions are handled through policies, rules or standard procedures
which have been set by top executives.
Non-programmed decisions are just reverse to programmed decisions. They are
unstructured, unique and nonrecurring and require custom-made solutions. They often deal
with complex issues that demand data gathering, forecasting, and strategic planning. Such a
decision would involve strategy, resource commitment, and long term investments. The top
executives take such decisions. They have no readymade courses of action as decisions may be
changed with the change in environmental factors. Non-programmed decisions are usually made
by general problem-solving processes, judgment, intuition and creativity. Once implemented, a
non-programmed decision is seldom used again.
Peter Drucker calls non-programmed decisions as strategic decisions and regards them as
truly managerial decisions. Strategic decisions include decisions on business objectives, capital
investment decisions, product mix decisions, etc.
(2) Organizational and Personal Decisions

If an executive takes any decision in his official capacity, that decision is called
organizational decision. Such decisions affect the functioning of the organization directly. The
authority for taking such decision is clearly defined in the organizational structure. Such
authority can be delegated.
Personal decisions are decisions, which are taken by an individual in his personal
capacity. Such decisions are concerned with him. They do not affect the organization directly
but affect indirectly by such decisions. For example, to retire voluntarily from the organization
is his personal decision. The power to make personal decisions cannot be delegated.
(3) Individual and Group Decisions

Decisions can also be classified on the basis of persons involved in the decision making
process. When an individual takes a decision, it is known as individual decision. Individual
decisions are generally taken in small organization. Individual decisions are also taken in big
organization if they are of routine nature.
When a number of persons collectively take the decision it is known as group decision
such as decision taken by the Board of Directors, committees, etc. Such decisions are generally
taken in big organizations, which follow the participative style of management. Such group
decisions are well balanced but they involve delay and make it difficult to fix responsibility of
such decisions.
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(4) Policy and Operating Decisions

Policy decisions are important decisions and they involve a change in the procedure,
program or strategy of the organizations. The top management takes such decisions. On the
contrary, operating decisions are taken by lower level management for the purpose of executing
policy decisions. They are generally concerned with the routine type of work. For example
deciding to grant leave with cash benefits to employees is a policy decision whereas calculating
the amount due to each employee is an operating decision.

C. DECISION MAKING CONDITIONS : CERTAINTY, RISK, AND

UNCERTAINTY

Everyday a manager has to make hundreds of decisions in the organization. There are
three conditions that managers may face as they make decisions. They are (1) Certainty, (2)
Risk, and (3) Uncertainty as shows in figure 1.2.

Organizational
Problem

Certainty Risk Uncertainty

Level of ambiguity and

possibility of making a bad
Lower decision
Moderate Higher

Fig. 1.2 : Decision Making Conditions

(1) Certainty
A state of certainty exists only when the manager knows the available alternatives as well
as the conditions and consequences of those actions. There is little ambiguity and relatively low
possibility of making a bad decision. It assumes that manager has all the necessary information
about the situation. Hence, decisions under certainty means a perfectly accurate decision will be
made time after time. Of course, decision making under certainty is rare.
(2) Risk
A state of risk exists when the manager is aware of all the alternatives, but is unaware of
their consequences. The decision under risk usually involves clear and precise goals and good
information, but future outcomes of the alternatives are just not known to a degree of certainty.
A risk situation requires the use of probability estimates. The ability to estimate may be due to
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experience, incomplete but reliable information, or intelligence. Statistical analysis can be

applied to the calculation of probabilities for success or failure. As shown in figure 6.3 decision
making under risk is accompanied by moderate ambiguity and possibilities of a bad decision.
(3) Uncertainty
In today's complex environment most significant decisions are made under a state of
uncertainty where there is no awareness of all the alternatives and also the outcomes, even for
the known alternatives. To make effective decisions, managers must acquire as much relevant
information as possible. Such decisions require creativity and the willingness to take a chance in
the face of such uncertainties. In such situations, managers do not even have enough information
to calculate probabilities and degrees of risk. So, statistical analysis is of no use. Hence,
managers need to make certain assumptions about the situation in order to provide a reasonable
framework for decision making. Intuition, judgment, and experience always play major roles in
the decision making process under conditions of uncertainty.
In conclusion, we can say that greater the amount of reliable information, the more likely
the manager will make a good decision.

D. DECISION MAKING PROCESS

Managers have to make decisions whether they are simple or complex. Effective decision
making requires a rational choice of a course of action. In order to make good decisions
managers should follow a sequential set of steps.
According to Griffin the rational process of decision making follow the following six
steps: (1) Recognize and define the decision situation; (2) Identify appropriate alternatives; (3)
Evaluate each alternative; (4) Select the best alternative; (5) Implement the alternative; and (6)
Evaluate the results and follow-up:
Step 1: Recognize and Define the Decision Situation

The first step in the decision making process is to recognize that a decision in needed. For
example, when production equipment fails, the manager must make a decision as to whether the
equipment is to be repaired, replaced or removed from service. Hence, the decision making
process is initiated by the awareness of a problem. A problem may be defined as the difference
between what is and what should be. A manager must recognize the 'gap' between actual and
desired situation. Problem solving is the process of identifying the gap and initiating corrective
action.
Problem solving begins with problem finding. Until the problem is accurately identified
and clearly understood no corrective action is possible.
After recognizing the problem sufficient time should be spent on defining the problem
precisely. The manager must develop a complete understanding of the problem, its causes and
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its relationship to other factors. This understanding comes from careful analysis of the situation.
The ability to handle problems is essential if a manager is to progress up the organizational
hierarchy.

Step 2: Identify Appropriate Alternatives

Once the decision situation has been effectively defined the second step is the identification
of alternative courses of action. A problem can be solved in many ways. All possible ways
should be identified. The decision maker should also not jump on the first feasible alternative to
solve the problem quickly. It is vital that managers be capable of creative and innovative
thinking for identifying alternatives. It can be a costly and time-consuming operation. Although
he must seek creative solutions and also recognize that various constraints often limit the
alternatives. Common constraints include legal restrictions, moral and ethical norms, authority
constraints. Typically, the more important the problem situation the more time and effort can be
spent for the exploration of alternative solutions.
Step 3: Evaluate Each Alternative

After the various alternatives are identified the next step is to analyze and evaluate each
alternative. It is important to establish some common framework to evaluate each alternative to
assure consistency and reliability. Griffin provides an evaluation framework in the form of
three-stage decision tree as shown in figure 1.3.

Is the alternative No Eliminate from

feasible ? consideration
Yes

Is the alternative No Eliminate from

satisfactory ? consideration
Yes
No Eliminate from
Are the alternative's
consequences affordable ? consideration
Yes
Retain for further
consideration
Fig. 1.3 : Alternatives in the Decision Making Process

First, the manager must ascertain whether or not the alternative feasible and practical?
Typical barriers to feasibility are costs, time, legal constraints and human factors. If an
alternative is not feasible, it should be eliminated from further consideration. If an alternative is
found to be feasible, the next test is to determine its satisfactoriness. For example, if the problem
demands reducing sales cost by 15 percent and the alternative under consideration will provide
only 10 percent reduction, the alternative may be eliminated from consideration.
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Lastly, if an alternative course of action is found both feasible and satisfactory, it needs to
be evaluated in terms of the affordability of the action consequences. The manager must
consider the alternative's impact on the customers, the firm's image, and other elements of the
organization.
Step 4: Select the Best Alternative

The manager will usually find that a number of alternatives will successfully pass the three
tests of the above decision tree. The task then becomes to select the best alternative for
implementation. Choosing the best is the real crux of decision making. The best alternative is
that which contributes maximum to the organizational goals. In selecting the best alternative
three approaches: (1) experience; (2) experimentation; (3) research and analysis are followed.
However, the manager selects the alternative that demonstrates the highest combined levels of
feasibility, satisfactoriness, and affordable consequences.
Step 5: Implement the Selected Alternative

After selecting the best alternative the management takes necessary steps to implement it.
Implementation is putting a decision into action. Managers must also consider people's
resistance to change when implementing change. They should anticipate potential resistance at
various stages of the implementation process. Thus, all concerned parties should be well
communicated and their full cooperation for the implementation should be obtained. Sometimes,
implementation fails because the managers cannot obtain enough support from the employees.
Step 6: Evaluate the Results and Follow-up

The implementation of the decision should be constantly monitored and evaluated.

Managers must determine the critical events to be measured, where and how they are to be
measured, and how the measurements are to be evaluated. These results must then be compared
with performance standard in order to ascertain if the new action is achieving the desired result.
If the management feels that the decision taken is not yielding the desired results, necessary
changes should be made in the decision or its implementation. An effective follow-up can
control the deviation in time.
Characteristics of a Good Decision

The decision making process passes through various steps. The basic objectives of all
these steps is to solve the problem. A decision is good if it has the following three
characteristics: (1) Action oriented, (2) Goal directed, and (3) Efficiency in implementation.
(1) Action Oriented: Decisions should be action oriented. Every decision is
implemented and therefore, various actions are necessary in its implementation. If decisions are
not implemented, they have no utility and require no action. Thus, a good decision must specify
the various actions, which are to be taken to achieve the objectives or solve problems.
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(2) Goal Directed: A good decision should be directed towards goal attainment. As
organizations are goal directed units, decision making should also be goal directed to enable the
organization to meet its goals. The success of a decision can be weighed with the attainment of
goal. Such attainment is a function of both the accuracy of the decision and implementation.
(3) Efficiency in Implementation: An effective decision should provide the way in
which it can be implemented. It should take into account all possible internal and external
factors, which are necessary in implementing the decision properly. Often good results are
obtained through proper implementation of proper decision.

E. GROUP DECISION MAKING

In most organizations today, important decisions are made by groups rather than by
individuals. Group decision making is a collective way of making decisions. Group members
choose from among two or more alternatives. It is often used in complex and important
situations.
In large and complex organizations most of the decisions are made by group of managers
rather than individuals. It seems safe to say that in many instances group decision making is
preferable than individual decision making. Decisions relating to the determination of
organization goals, formulation of plans, strategies, and policies fall under this category. At
present, organizational problems have become so complex which requires a variety of
specialized and abilities that no one person can handle effectively.
Various decision making techniques and the supporting quantitative techniques have been
devised for enhancing the effectiveness of decision making process. The common techniques/
methods of group decision making are presented below:
(1) Brainstorming
In many situations, groups are expected to produce creative or imaginative solutions to
organizational problems. In such instances brainstorming has been found to enhance the creative
output of the group. Brainstorming is a useful technique for generating ideas about possible
causes of problems, and about potential solutions to problems, once they have been identified.
The objective of a brainstorming is to generate lots of ideas on a particular subject. On
seemingly useless idea may stimulate another one that is valuable. The technique of
brainstorming includes a strict series of rules. The basic rules are:
(a) No idea is too ridiculous. Group members are encouraged to state any extreme or
outlandish idea.
(b) Each idea presented belongs to the group, not to the person stating it. In this way, it is
hoped that group members will utilize and build on the ideas of other.
(c) No idea can be criticized.
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(d) The good ideas are selected later.

Within these rules brainstorming maximizes the interpersonal sharing of ideas.
Unfortunately, it fosters problems of group dynamics, that tend to limit the creative process.
(2) Delphi Technique
The Delphi technique is a systematic means to obtain consensus from a group or panel of
experts. The panel does not meet as a committee to discuss, or debate. In this technique
participants are asked to give their ideas, suggestions, and views on the decisional problem. All
responses are transcribed into a single document. Then the results are sent back to the panel
members and again their reactions to others' views, ideas, and suggestions are collected. The
names of the participants are kept anonymous. It helps to evoke each participant's unbiased
opinion by preventing the influences of group dynamics. A panel coordinator contacts each
participant usually by a mail questionnaire.
This technique has been found useful in bringing out the ideas and obtaining the
contributions of their specialized knowledge, skills, abilities, and information, while avoiding
face-to-face communication. The Delphi technique has found its greatest success in surveying
experts with respect to forecasting and future predictions. However, it is time consuming.
(3) The Nominal Group Technique (NGT)
A manager who must make a decision about an important issue sometimes needs to know
what alternatives are available and how people would react to them. A technique called the
nominal group technique (NGT) has been developed to fit this situation. NGT is a group
decision-making technique that follows a highly structured format. The term nominal means that
for much of the activity, the participants are a group in name only; they do not interact.
Basically, NGT is structured group meeting that proceeds as follows: a group of
individuals (7 to 10) sit around a table but do not speak to one another. The problem is presented
to them, and they write their reactions, ideas, suggestions, and views on a sheet of paper. After
this process is over, structured sharing of ideas takes place. Each person around the table
presents his ideas. A person designated as recorder writes the ideas of various members on a
blackboard. At the end of it, there is a list of ideas open for discussion. Each idea is discussed
fully before moving on to the next one. The next stage involves independent voting in which
each participant selects priorities by ranking or voting. The final group decision is the pooled
outcome of the individual vote.
NGT is effective because it follows the logic of the problem solving and decision making
method and allows for group participation. It also provides a discipline.
Both Delphi techniques and NGT are relatively new group techniques. Basic differences
between them are as follows:
(a) Delphi participants are typically anonymous to one another, while NGT participants
become acquainted.
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(b) NGT participants meet face-to-face around a table, while Delphi participants are physically
distant and never meet face-to-face.
(c) In the Delphi process, all communication between participants is by way of written
questionnaires and feedback from monitoring staff. In NGT, communication is direct
between participants.
These three techniques discussed here are practical devices whose purpose is to improve
the group decision making.

DECISION MAKING
By:
Prof. Kul Narsingh Shrestha
(Source: Principles of Management By Prof. Kul Narsingh Shrestha)