Infolink University college Department ofBusiness Business Management

CHAPTER THREE

DECISION MAKING

4.1Meaning of decision making

Decision making: is the process of selecting or choosing the best course of action
from a number alternativesof based on some criteria.
Decision-making: is defined as a rational choice among alternatives. There have
to be options to choose from; if there are not, there is no choice possible and no
decision.
Decision-making: is a process, not a lightning bolt occurrence. In making the
decision, a manager is making a judgment, reaching a conclusion, from a list of
known alternatives.Decision-making is part of every aspect of the manager’s duties,
which include planning, organizing, staffing, leading and controlling, i.e. decision-
making is universal. In all managerial functions decision-making is involved. All
managerial functions have to be decided. For example, managers can formulate
planning objectives only after making decisions about the organization’s basic
mission. Decision-making is a selection process, the means to achieve the end, the
application of intellectual abilities to a great extent, a dynamic process, situational
and taken to achieve the objectives of an organization. Decision making includes
the evaluation of available alternatives through critical appraisal methods.

Effective decision making requires a rational selection of a course of action.

Managers’ goals can be reached under existing circumstances and limitations. They
must also have the information and the ability to analyze and evaluate alternatives
in the light of the goals sought. And finally, they must have a desire to come to the
best solution by selecting the alternative that most effectively satisfies goal
attainment. Thus, rationality implies making decision based on facts, experience,
experimentation or research and analysis with distinct procedure.
4.2The Decision‐Making Process
Managers are constantly called upon to make decisions in order to solve problems.
Decision-making and problem solving are ongoing processes of evaluating
situations or problems, considering alternatives, making choices, and following
them up with the necessary actions. Sometimes the decision-making process is
extremely short, and mental reflection is essentially instantaneous. In other
situations, the process can drag on for weeks or even months. The entire decision-
making process is dependent upon the right information being available to the right
people at the right times. The followings are the process of decision making.
1. Identifying problems and opportunities
A necessary condition for a decision to exist is a problem - the discrepancy between
an actual and desired state; a gap between where one is and where one wants to
be. If problems do not exist, there will be no need for decisions; i.e. problems are

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prerequisites for decisions. The severity of the problem for the organization is
measured by the gap between the levels of performance specified in the
organization’s goals and objectives and the level of performance attained; i.e. it is
measured by the gap between level of performance specified (standards set) and
level of performance attained. The problem is very critical when the gap between
the standard set and actual performance attained is very high. To locate problems,
managers rely on several different indicators.
Problem indicators

 Deviations from past performance: A sudden change in some established

pattern of performance often indicates that a problem has developed. When
employee turnover increases, sales decline, selling expenses increase, or more
defective units are produced, a problem usually exists.
 Deviation from plan: When results do not meet planned objectives, a problem
is likely. For example, a new product fails to meet its market share objective,
profit levels are lower than planned, the production department is exceeding its
budgets. These occurrences signal that some plan is off course.
 Out side criticism: The actions of outsiders may indicate problems. Customers
may be dissatisfied with a new product or with their delivery schedules; a labor
union may present a grievance; investment firms may not recommend the
organization as a good investment opportunity; alumni may withdraw their
support from an athletic program.

Confusions are common in problem definition because the events or issues that
attract the manager’s attention may be symptoms of another more fundamental
and pervasive difficulty than the problem itself. That is, there may exist confusion
on the identification of a problem and its symptoms. The accurate definition of a
problem affects all the steps that follow. Managers once they have identified
problems, they have to try to diagnose the cause of the problem. Causes unlike
symptoms are seldom apparent.
2. Developing Alternatives
Before a decision is made feasible alternatives should be developed. This is a
search process in which relevant internal and external environment of the
organization are investigated to provide information that can be developed into
possible alternatives. At this point it is necessary to list as many possible
alternatives solutions to the problem as you can. No major decision should be made
until several alternative solutions have been developed. Decision-making at this
stage requires finding creative and imaginative alternatives using full mental
faculty. The manager needs help in this situation through brainstorming or Delphi
technique.

Brainstorming:Brainstorming is the process of suggesting many possible

alternatives/ideas without evaluation or criticism.Brainstorming is a good technique
for generating alternatives. It is not appropriate, however, for evaluating
alternatives or selecting solutions.

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Delphi technique: It is a group process that anonymously generates ideas or

judgments from physically dispersed experts through questionnaires and
feedback.

3. Evaluating Alternatives
Once managers have developed a set of alternatives, they must evaluate them to
see how effective each would be. Each alternative must be judged in light of the
goals and resources of the organization and how well the alternative will help solve
the problem. In addition, each alternative must be judged in terms of its
consequences for the organization. Will any problems arise when a particular course
of action is followed? Such factors as worker’s willingness…
Evaluating the alternatives can be done in numerous ways. Here are a few
possibilities:
■ Determine the pros and cons of each alternative.
■ Perform a cost-benefit analysis for each alternative.
■ Weight each factor important in the decision, ranking each alternative relative to
its ability to meet each factor, and then multiply by aprobability factor to provide a
final value for each alternative.
Regardless of the method used, a manager needs to evaluate each alternative in
terms of its
■ Feasibility-Can it be done?
■ Effectiveness-How well does it resolve the problem situation?
■ Consequences-What will be its costs (financial and nonfinancial)to the
organization?
4. Choosing an Alternative
Based on the evaluation made managers select the best alternative. In trying to
select an alternative or combination of alternatives, managers find a solution that
appears to offer the fewest serious disadvantages and the most advantages. The
purpose of selecting an alternative is to solve the problem so as to achieve a
predetermined objective. Managers should take care not to solve one problem and
create another with their choice. A decision is not an end by itself but only a means
to an end. This means the factors that lead to implementation and follow –up should
follow solution selection.
5. Implementing the Chosen Solution
For the entire decision-making process to be successful, considerable thought must
be given to implementing and monitoring the chosen solution. It is possible to make
a "good' decision in terms of the first five steps and still have the process fail
because of difficulties at this final step. A decision that is not implemented is little
more than an abstraction. In other words, any decision must be effectively
implemented to achieve the objectives for which it was made. Implementing a
decision involves more than giving orders. Resources must be acquired and
allocated. Decisions are not ends by themselves they are means to an end; so
proper implementation is necessary to achieve that end.
6.Establishing a control and evaluation system

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Monitoring is necessary to ensure that things are progressing as planned and that
the problem that triggered the decision process has been resolved. Effective
management involves periodic measurements of results. Actual results are
compared with planned results (the objective); if deviations exist, changes must be
made. Here again we see the importance of measurable objectives. If such
objectives do not exist, then there is no way to judge performance. If actual results
do not much planned results, then the changes must be made in the solution
chosen, in its implementation, or in the original objective if it deemed unattainable.
The various actions taken to implement a decision must be monitored.

The more important the problem, the greater the effort that needs to be expended
on appropriate follow up mechanisms. Are things working according to plan? What
is happening in the internal and external environments as a result of the decision?
Are subordinates performing according to expectations? ……. must be closely
monitored.
4.3Types of decision
Although managers in large business organizations, government offices, hospitals
and schools may be separated by background, lifestyle and distance, they all
sooner or later must share the common experience of making decisions. They all
will face situations involving several alternatives and an evaluation of the outcome.
In this section we will discuss two types of decisions : programmed and non
programmed.
1. Programmed Decisions
Programmed decisions are those made in routine, repetitive, well-structured
situations through the use of predetermined decision rules. Managers have made
the same decision many times before and little ambiguity involved. The decision
rules may be based on habit, computational techniques, or established policies and
procedures. Such rules usually stem from prior experience or technical knowledge
about what works in the particular type of situation. Most of the decisions made by
first line managers and many of those made by middle managers are the
programmed type, but very few of the decisions made by top-level managers are
the programmed type. Managers can usually handle programmed decisions through
rules, procedures, and policies.
E.g. Establishing a re-order point, Decide if students meet graduation requirements,
Determination of employee pay rates.
2. Non-programmed Decisions
Non-programmed decisions are used to solve non-recurring, novel, and
unstructured problems. No well-established procedure exists for handling them,
because it has not occurred before managers do not have experience to draw up
on, or problems are complex or completely new. Because of their nature non-
programmed decisions usually involve significant amounts of uncertainty. They are
treated through farsightedness. Most of the highly significant decisions that
managers make fall into the non-programmed category. Non-programmed decisions

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are commonly found at the middle and top levels of management and are often
related to an organization’s policy-making activities.
E.g. To add a product to the existing product line, to reorganize a company, to
acquire another firm
Types of Managerial Decisions
Type of Type of Procedures Examples
decisions problem
Programme Repetitive Rules, Business: processing payroll vouchers
d , routine standard College: processing admission
operating applicants
procedures, Hospital: preparing patient for surgery.
policies
Non- Complex, Creative Business: introducing a new product.
programme novel problem College: constructing new classroom
d solving facilities
Hospital: reacting to regional disease
epidemic
Government: solving spiraling inflation
problem
4.4Decision-Making Conditions
When managers make decisions, the amount of information available to them or the
degree of knowledge they have about the likelihood of the occurrence of each
alternative vary from managers to managers or/and from situation to situation. To
put it in other way, decisions are made under three basic conditions. These are
condition of certainty, condition of risk, and condition of uncertainty.
1. Decision-making under Certainty
When managers know with certainty what their alternatives are and what conditions
are associated with each alternative, a state of certainty exists. Decisions under
certainty are those in which the external conditions are identified and very
predictable; i.e. we are reasonably sure what will happen when we make a decision.
The information is available and is considered to be reliable, and we know the cause
and effect relationships. In decision-making under certainty there is a little
ambiguity and relatively low chance of making poor/bad decisions. Decision-making
under certainty seldom occurs, however, because external conditions seldom are
perfectly predictable and because it is impossible to try to account for all possible
influences on any given outcome it is very rare.
2. Decision-making under Risk
A more common decision-making situation is under risk. In a risk environment, the
manager lacks complete information.Under the state of risk, the availability of each
alternative, the likelihood of its occurrence and its potential payoffs and costs are
associated with probability estimates; i.e. decisions under risk are those in which
probabilities can be assigned to the expected outcomes of each alternative. I

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n a risk situation, managers may have factual information, but it may be

incomplete. There is moderate ambiguity and moderate chance of making bad
decision.E.g. tossing a coin, metrology
3. Decision-making under Uncertainty
Under this condition the decision maker does not know what all the alternatives are,
what the probability of each will occur is or what consequence each is likely to have.
This uncertainty comes from the dynamism of contemporary organizations and their
environment. Big multi-national corporations assume these kinds of decisions.

Decision-making under uncertainty is the most ambiguous and there is high chance
of making poor decisions. In decision-making under uncertainty, probabilities cannot
be assigned to surrounding conditions such as competition, government
regulations, technological advances, the overall economy, etc. Uncertainty is
associated with the consequences of alternatives, not the alternatives themselves.
The decision-making is like being a pioneer. Reliance on experience, judgment, and
other people's experiences can assist the manager is assessing the value of
alternatives.
E.g.Innovation of new machine, journey of discoverers.
Why Do Managers Make Poor Decisions?
All managers recognize the importance of making sound decisions. Yet most
managers readily admit having made poor decisions that hurt their company or
their own effectiveness. Why do managers make mistakes? Why don’t decision
always result in achieving some desired goal? Making the wrong decision can result
from any one of these decision-making errors:
 Lack of adequate time: Waiting until the last minute to make a decision often
prevents considering all alternatives. It also hampers thorough analyses of the
alternatives.

 Failure to define goals: Objectives cannot be attained unless they are clearly
defined. They should be explicitly stated so that the manager can see the
relationship between a decision and a desired result.

 Using unreliable sources of information: A decision is only as good as the

information on which it is based. Poor sources of information always result in
poor decisions.

 Fear of consequences:Managers often are reluctant to make bold,

comprehensive decisions because they fear disastrous results. A “plays it safe”
attitude sometimes limits a manager’s effectiveness.

 Focusing on symptoms rather than causes: Addressing the symptoms of a

problem will not solve it. Taking aspirin for a toothache may provide temporary
relief, but if an abscess causes the pain, the problem will persist. Business
managers too often foul on the results of problems instead of the causes.

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 Reliance on Hunch and Intuition: Intuition, judgment and ‘feel’ are important
assets to the decision maker. But a manager who permits intuition to outweigh
scientific evidence is likely to make a poor decision.

Sometimes a manager’s decision is not exactly “poor”, but it still doesn’t produce
optimal results. Less than optimal decisions can have three causes:
1. Bounded rationality imposes limits on a decision, such as that it should be
economical or logistically practical. This limit serves as a screening device,
eliminating some of the alternatives. The manager must choose from the options
that have filtered through the restrictions. The overall optimal decision may no
longer be a valid option when using this method. The decision maker simply
selects the best alternative, given various specifications that must be met.
2. Sub optimization is a manager’s tendency to operate solely in the interests of
his/her department rather than in the interests of the company as a whole. In
making a decision, the department manager cannot be so self-centered as to
ignore the effects of the action on other areas. The key is to improve the
company’s performance, not just the performance of one department.
3. Unforeseen changes in the business environment also cause less than
optimal decisions.
4.5 Decision-Making Techniques
A group can make decisions by working together through the basic decision
making process. However, group decisions can be enriched when the group
uses techniques that stimulate creativity in group processes. The following are
among the most widely used techniques.
1) Brainstorming
Brainstorming is the process of suggesting many possible alternatives/ideas without
evaluation or criticism.
Brainstorming is based on observing the following rules:
1) Group members are encouraged to state any idea that comes to mind,
even if it is wild, extreme or outrageous.
2) Group members are encouraged to use and build on another’s ideas.
3) Group members may not criticize any idea.
Only after brainstorming is completed does the group evaluate ideas and possibly
select one to develop and implement.
Brainstorming is a good technique for generating alternatives. It is not appropriate,
however, for evaluating alternatives or selecting solutions. For resolving issues that
require innovative or imaginative responses, a group can benefit from using
brainstorming in the early stages of decision-making process.
2) Nominal group technique
It is a structured approach to decision making that focuses on generating
alternatives and choosing one alternative by voting. Nominal group technique has
the following distinct steps:
a) Individuals silently list their ideas.
b) Ideas are written on a chart one at a time until all ideas are listed.
c) Discussion is permitted, but only to clarify the ideas. No criticism is allowed.
d) A written vote is taken secretly to select the alternative.
The nominal group techniques reduces the roadblocks to group decision
making by (1) separating brainstorming from evaluation, (2) promoting

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balanced participation among group members, and (3) incorporating

mathematical voting techniques in order to reach consensus.
Nominal group technique is a good technique to use in a situation where group
members fear criticism from others.
3) Delphi technique

It is a group process that anonymously generates ideas or judgments from

physically dispersed experts through questionnaires and feedback.

The group coordinator sends out questionnaires asking about the issue to its
members, and then sends out another round of questionnaires that summarizes the
responses from the first questionnaire and asks for further opinions. The process is
repeated until the participants reach a consensus.
4) Interacting group decision (consensus)
Consensus is the process of presenting opinions and gaining agreement to
support a decision. Group members openly discuss, argue about and agree on the
best alternative(s).
According to a decision-making expert, a consensus “is reached when all members
can say they either agree with the decision or have had their „day in court‟
and were unable to convince the others of their viewpoint. In the final
analysis, everyone agrees to support the outcome.” This definition indicates that
consensus does not require unanimous agreement because group members may
still disagree with the final decision but are willing to work toward its success.

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